TREASURIES-U.S. bonds rise as investors wait out budget stalemate
* U.S. one-month T-bill yields hit highest since November
Treasuries CDS prices nearing 2011 debt-fight levels
* U.S. jobless claims little changed in latest week
By Steven Norton
NEW YORK, Oct 3 (Reuters) - Short-term U.S. Treasury debt yields rose on Thursday, as a partial U.S. government shutdown fanned fears that lawmakers would not raise the debt ceiling before a mid-October deadline, which could wreak havoc in funding markets.
The shutdown, in its third day, modestly boosted the price of longer-dated yields, but increases in the yield on one-month bills, along with rising costs to insure against a U.S. debt default, showed that concerns about the coming deadline are growing.
Lack of progress in ending the partial government shutdown fed worries that lawmakers would also not agree on a deal to increase the statutory $16.7 trillion borrowing limit by the Oct. 17 deadline.
While the likelihood of an actual default is slim, investors said, the ongoing negotiations in Washington have stoked concerns.
"The closer you get to the deadline, the more nervous investors will probably be," said John Briggs, managing director and head of cross asset strategy at RBS Markets and International Banking in New York.
There is fear that failure to increase the debt ceiling would unleash market chaos and damage the long-term creditworthiness of the U.S. government and the safe-haven status of the dollar.
That worry was evidenced by an inverted yield curve. Yields on one-month bills maturing on Oct. 31 - two weeks after the date the debt ceiling must be increased - have risen above six-month bill rates. The yield on the Oct. 31 bill touched 0.17 percent on Thursday, the highest since November, compared with a 0.03 percent rate for the issue that matures one week later.
While it's not likely payments will be missed, RBS' Briggs said behavioral actions were leading the run-up in yields.
"If you own those bills and there's a missed payment, how are you going to explain it to your board?"
As concerns over a possible default intensified early Thursday, the cost to insure Treasuries rose in the credit default swaps market, though analysts qualify that by noting that market is not particularly broad or deep.
The premium on one-year U.S. sovereign debt touched its highest since July 2011, when the first debt ceiling showdown occurred between President Barack Obama and Republican lawmakers.
Jitters were also evident on Wall Street, where the Standard & Poor's 500 stock index ended regular trading on Thursday down 0.9 percent.
The losses on Wall Street encouraged a move to Treasuries, boosting benchmark 10-year notes 3/32 in price as their yields eased to 2.61 percent from 2.63 percent late on Wednesday, close to a seven-week low.
If the prospect of a default becomes imminent, "you will see the orderly repricing that is going on right now become disorderly," said Robert Tipp, chief investment strategist at Prudential Fixed Income, with $400 billion in assets under management, in Newark, New Jersey.
"For the market, any significant doubt as to the timely payment of interest or principal on Treasury securities would be tantamount to the Earth ceasing to rotate on its axis."
Strategists cited technical resistance at 2.60 percent for the 10-year yield and said if the yield slipped below that level for a sustained period, the next move would be to 2.45 percent.
Yields briefly rose from their lows on a report in The New York Times that House of Representatives Speaker John Boehner, according to one House Republican, has told colleagues he is determined to prevent a federal default. Boehner's office did not confirm that account to Reuters.
Economic data took a back seat to the political fighting in Washington. The Institute for Supply Management index showed the non-manufacturing sector of the economy grew in September, but not as quickly as it did in August.
The U.S. Labor Department said jobless claims totaled 308,000 for the week ended Sept. 28, compared with an upwardly revised 307,000 in the previous week. Because of the shutdown, the Labor Department will not release the September nonfarm payrolls report scheduled for Friday.