TREASURIES-Market ends mixed as 30-year bond auction draws buyers
* Strong 30-year bond auction lifts prices
* Fed bought $1.38 billion in TIPS due 2028-2043
* Market focuses on efforts to raise debt ceiling
NEW YORK, Oct 10 (Reuters) - U.S. Treasuries ended mixed on Thursday after strong demand for a 30-year Treasury bond sale erased most early losses. Meanwhile, the outlook for a deal on raising the U.S. debt ceiling remained uncertain, giving the bond market little direction. Republicans said they would offer President Barack Obama a short-term increase in the federal debt limit if he would agree to negotiate with Republicans on a broad range of fiscal issues, including funding to reopen the government. Prices began the day even lower, but the low prices and higher yields drew buyers to the Treasury's $13 billion 30-year bond auction and prices rose from the day's lows. "The bond auction was well bid for at the bidding deadline and very decent demand from real money accounts carried the auction to better levels," said Thomas di Galoma, co-head of fixed income rates at ED&F Man Capital in New York. Treasuries had traded weaker before the auction and built in a concession, said Ian Lyngen, Treasury strategist at CRT Capital Group in Stamford, Connecticut. Prices bounced from the lows following the sale. An elusive U.S. debt-ceiling deal also boosted the appetite for liquid U.S. debt. While failing to raise the debt ceiling could trigger a default on U.S. Treasury debt coming due in the near future, anxiety about such an event prompts a liquidity bid for U.S. debt farther out on the maturity curve, tending to raise the price of U.S. debt and put downward pressure on yields. That has led to the short end of the yield curve inverting since yields on U.S. debt due the soonest must compensate for the risk of late payment. Selling picked up in overnight trading after Treasuries yields broke above their recent support levels. But it tapered off before the 30-year bond sale on Thursday. Benchmark 10-year notes were last down 6/32 in price to yield 2.69 percent, still just above a recent technical support level of around 2.68 percent. "The strong 30-year bond auction sparked a quick wave of short-covering, and there was additional improvement based on having the week's supply out of the way without any difficulties, allowing for an unwinding of some hedging related to the auctions," said John Canavan, fixed income analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. Thirty-year bonds erased an early, pre-auction loss and were up 5/32 in late trade, yielding 3.73 percent. Besides the 30-year bonds sold on Thursday, the Treasury sold three-year notes on Tuesday and 10-year notes on Wednesday. Treasuries have largely traded sideways for the past two weeks, with many investors reluctant to enter new trades due to the political stalemate in Washington. The U.S. government entered its 10th day of partial shutdown on Thursday and fears have been rising that the political conflict could keep the debt ceiling from being raised and lead to a default on some short-term U.S. debt, an event that would undermine needed confidence in a benchmark asset to which all other financial markets are connected. "Bonds sold off a bit while equities and credit rallied all on the idea of some deal happening 'soon,"' said Jack Flaherty, investment director at GAM USA Inc in New York. "Then Treasuries moved up from the lows on talk that made a deal look farther off than it seemed in the morning," he said. Flaherty called the fluctuations "a lot of noise. "A debt deal will get done and rates will go back up. It's a matter of when, not if. But maybe the markets' complacency isn't putting enough pressure on the politicians in D.C," he said. The current on-the-run one-month Treasury bill yields , which mature on November 7, traded at 0.25 percent on Thursday, below a five-year high of 0.36 percent on Tuesday. The cost to finance overnight trades backed by Treasuries in the repurchase agreement market also shot higher on Thursday, opening at around 27 basis points before falling back to around 10 basis points, said traders. Banks and money funds have begun to stipulate that they will not accept Treasuries at risk of delayed payments to back repo loans. The Federal Reserve bought $1.38 billion in Treasury Inflation-Protected Securities (TIPS) due from 2028 to 2043 on Thursday as part of its ongoing purchase program.