TREASURIES OUTLOOK-Safe-haven bonds up as U.S. gov't shutdown looms
* Hopes remain for last-minute U.S. budget deal
* August personal income +0.4 pct, spending +0.3 pct
* New York Fed's Dudley: Labor market not yet healthy
NEW YORK, Sept 27 (Reuters) - U.S. Treasuries prices rose on Friday, driven by safe-haven demand on concerns about the implications of a possible U.S. government shutdown.
Washington braced for a partial shutdown on Tuesday as Congress struggled to pass an emergency spending bill that Republicans want to use to achieve Tea Party-backed goals, such as defunding the new healthcare reform law.
"The driver has been what's going on in Washington," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. "Equities have been trading pretty weak and there's definitely a safe-haven bid in the Treasury market."
Benchmark 10-year Treasury notes were up 10/32, with yields easing to 2.62 percent from 2.65 percent late on Thursday. Five-year notes rose 6/32 in price, driving their yields down to 1.40 percent from 1.44 percent.
Thirty-year bonds rose 10/32, their yields easing to 3.68 percent from 3.70 percent.
If the government shuts down non-essential operations on Tuesday, a number of key economic data, including the all-important monthly jobs report due on Friday, could be delayed.
In addition, unless Congress raises the debt ceiling by Oct. 17, the Treasury will only have $30 billion in cash on hand, leaving the United States on the edge of an unprecedented default, the Treasury said on Wednesday.
The cost to insure against a U.S. default rose on Friday to its highest since May. Investors would have to pay about 32,000 euros to insure 10 million euros worth of Treasuries against a default in five years, up from 31,000 euros on Thursday and 22,000 euros a week ago, according to data from Markit.
Steve Van Order, fixed-income strategist with Calvert Investments in Bethesda, Maryland, said the wrangling in Washington could continue until stock investors get nervous and the stock market sells off sharply.
"That's usually the signal to politicians to scramble and do something," he said.
"We think the volatility risk is shifting more toward stocks now, and for buyers of corporate debt that could offer some opportunities if spreads widen out a bit."
While a government shutdown is possible, analysts say ultimately a compromise will likely be reached to raise the debt ceiling, which is the more crucial issue.
Earlier, data showed modest gains in personal income and spending in August, as well as a narrow rise in a closely watched inflation measure.
"Consumer spending and PCE inflation this morning are not telling the Fed they need to taper any time soon," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ.
The prospect of low interest rates for longer has lifted Treasury prices since the Fed decided last week to put off unwinding any of its monetary accommodation until it had more confidence in the sustainability of the economic recovery.
New York Federal Reserve Bank President William Dudley said on Friday that the U.S. labor market still cannot be regarded as healthy. On Monday, he said the Fed still needs to push hard against threats to the U.S. economic recovery.
Narayana Kocherlakota, president of the Minneapolis Fed, in an interview with Reuters, said that the next Fed chair will need to resist the temptation to wind down monetary stimulus.
"The tone in the Treasury market improved in the last week since the 'un-taper'," said Gene Tannuzzo, fixed income portfolio manager at Columbia Management in Minneapolis.
Over the longer term, Treasuries are drawing buyers because U.S. government debt is perceived as being more fairly valued than it was last May when benchmark 10-year Treasury yields were about 100 basis points lower than they are now, Tannuzzo said.
"We went from overvalued then to approximately fair value today," he said, citing fair value for the 10-year yield at between 2.60 percent and 2.90 percent.
Investors in bond funds worldwide put a net $4.5 billion into bond funds in the week following the Fed's decision to keep its bond-buying program unchanged, data from a Bank of America Merrill Lynch Global Research reported showed Friday.
The flows into bond funds in the week to Sept. 25 reversed eight straight weeks of net outflows and marked the strongest new demand for the funds in five months.
As part of its ongoing efforts to foster economic activity and lower unemployment, the New York Fed purchased $5.551 billion in Treasury coupons on Friday with maturities ranging from June 30, 2018, through May 31, 2019.
(Additional reporting by Ellen Freilich; Editing by James Dalgleish, Leslie Adler and Andre Grenon)