U.S. Treasury debt prices rose on Tuesday as traders turned their focus on a looming fight in Washington to raise the federal debt ceiling, stoking bids for government debt despite the risk of a federal default.
The Federal Reserve's bond purchases aimed at supporting the economic recovery, together with remarks from central bank officials including Chairman Ben Bernanke that were perceived as assuring the Fed will cling to its quantitative easing program in the foreseeable future, also propelled bond prices higher.
"There's fear about the debt ceiling debate. We are running out of days to deal with it," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment in New York.
The U.S. Treasury cautioned on Monday the United States was on track to exhaust its options to meet its debt obligations between mid-February and early March.
U.S. President Barack Obama and Republican lawmakers are expected to enter a tough round of negotiations over spending cuts, just days after they hammered out a deal to avert a series of automatic tax hikes and fiscal reductions, known as the 'fiscal cliff.'
Another battle to raise the federal borrowing cap, currently at $16.4 trillion, will be a "material risk," which Fitch Ratings said on Tuesday to strip the United States of its top AAA-rating. Standard & Poor's downgraded the world's biggest economy in August 2011 after the first fight between Obama and Republicans over the debt ceiling.
Most investors expected the U.S. debt ceiling will be raised to avert a default, although a deal will likely come down to the wire similar to the one nearly 1-1/2 years ago.
Benchmark 10-year notes rose 3/32 in price at 98-3/32 with their yields at 1.838 percent. The 10-year yield flirted with a two-week low at 1.81 percent earlier, compared with $1.847 percent late on Monday.
Thirty-year bonds climbed 5/32 to 94-18/32 with their yields falling to 3.027 percent from 3.035 percent on Monday.
(Read More: Rising Bond Yields—This Is Just the Start)
Earlier, a government report showing a stronger-than-expected 0.5 percent rise in domestic retail sales in December prompted brief profit-taking in Treasurys.
The U.S. bond market initially moved higher in tandem with a rise in German Bund prices.
(Read More: Falling Italian Bonds Yields Justified: Finance Minister)
Worries About Risk Appetite
While a U.S. default would damage the long-term appeal of its debt to investors and foreign governments, traders were more worried about such an event paring appetite for stocks and risky investments and taking a toll on the global economy.
The interest rates on some Treasury bills have risen on the growing risk that Congress might not increase the debt ceiling and that the holders of these T-bills might not be repaid on time.
The rates on T-bills that mature in late February to early March when the government is set to reach its borrowing limits were running at 0.10 to 0.11 percentage point, which were double the levels on rates on T-bills due in January.
In credit default swap market, the five-year cost to insure U.S. Treasurys rose to 0.43 percentage point, the highest level since early October but still some 0.20 point below the level seen during a similar issue over the debt ceiling in the summer of 2011, according to data firm Markit.
A possible U.S. default will likely accompany a round of federal budget cuts that would hurt the domestic economy.
"A lack of resolution might result in the sequester going through, which would be a bigger fiscal drag than is priced in now; and if growth is slower, that's positive for Treasurys," said Thomas Graff, fixed-income portfolio manager at Brown Advisory in Baltimore, Maryland.
Bond prices also were bolstered when Fed Chairman Ben Bernanke on Monday offered no sign that the Fed would curb its aggressive bond purchases despite speculation - raised by the release of minutes from the Fed's most recent policy meeting - that purchases could end this year.
On Tuesday, Minneapolis Fed President Narayana Kocherlakota called for more Fed easing to help lower unemployment which has remained at historic high levels.
As part of its $45 billion monthly purchases of government securities aimed to help the economy, the Fed bought $927 million in Treasurys that mature from February 2023 to February 2031.