TREASURIES-U.S. bill rates edge up on default jitters
* Eyes on Washington as shutdown delays payrolls report
* U.S. one-month T-bill rates hover at highest in 10 months
* One-year U.S. CDS prices revisit 2011 debt-fight levels
NEW YORK, Oct 4 (Reuters) - Growing worries about a U.S. government default lifted the interest rates on ultra short-term U.S. Treasury bills to their highest levels in over 10 months on Friday.
As the first partial federal government shutdown in 17 years entered into its fourth day, the Labor Department delayed the release of its closely watched payrolls report, which would have been the premier focus for traders. Instead, they continued to await for hints the White House and Congress might be coming closer to an agreement to increase the government's $16.7 trillion statutory borrowing limit.
They have also prepared for the rising possibility that the Treasury might skip repaying investors and foreign central banks on their U.S. debt holdings.
Eight-five billion dollars worth of Treasury bills will mature on Oct. 17 when the government is projected to reach its debt ceiling. The interest rate on that T-bill issue last traded at 0.13 percent, up 2 basis points from late on Thursday and up 9 basis points on the week.
"We are seeing some real volatility in the bill sector," said Jason Rogan, managing director of Treasuries trading at Guggenheim Partners in New York. "Bills are showing the first signs of distress."
Interest rates on T-bills that mature in the first half of November last traded at 0.11 percent, 5 basis points higher than late Thursday and up 9 basis points from a week earlier.
Failure to increase the debt ceiling, traders fear, would unleash market chaos and damage the long-term creditworthiness of the U.S. government and the safehaven status of the dollar.
With little progress shown in Washington on a deal to raise the borrowing cap, the cost to insure a U.S. default in the derivatives market nearly doubled this week, approaching the level last seen in July 2011 during the first debt ceiling showdown between President Barack Obama and top Republican lawmakers.
Investors would pay about 55,300 euros to insure 10 million euros worth of Treasuries for a year on Friday, according to Markit. The premium was as high as 58,000 euros earlier.
A week ago, the cost on one-year U.S. sovereign credit default swap was nearly 29,000 euros.
GLIMMER OF HOPE ON DEAL
While the ongoing government shutdown and the looming debt ceiling deadline have roiled the bill sector, longer-dated government securities have held in a tight range, suggesting traders are clinging to hopes of a last-minute deal to avoid a default, analysts and traders.
"Most people in the market still assume something will get done," Rogan said.
Benchmark 10-year Treasury notes last traded 10/32 lower in price with a yield of 2.643 percent, up 4 basis points from late on Thursday.
For the week, the 10-year yield bounced in a narrow 9 basis point range from an intraday low of 2.58 percent to a high of 2.67 percent, according to Reuters data.
Interest rates on Treasury bills that mature after mid-November traded in the single digits.
The credit default swap market also signaled expectations of disruption to the Treasuries market would be brief, not a protracted one that damages long-term investor confidence.
The price on one-year CDS on Treasuries stood 15 basis points above the five-year price, the widest gap since July 2011.