TREASURIES-Prices gain on debt deal progress, Oct T-bill rates fall
* Oct T-bill rates drop, Feb bill rates elevated
* Longer-dated debt rallies on hopes over debt ceiling deal
* Fed to buy $2.75 bln-$3.50 bln notes due 2020-2023 Thursday
* Treasury sells $20 bln one-month bills, $22 bln one-year debt
NEW YORK, Oct 16 (Reuters) - Yields of some Treasuries bills fell from five-year highs on Wednesday after lawmakers looked set to make a deal to lift the debt ceiling until February, though damage from the brinkmanship in Washington was seen as likely to continue to weigh on the market. Yields on Treasury bills that come due later this month fell in highly volatile trading on reports of a deal, after skyrocketing in the morning. Interest rates of bills that come due in February rose, however, as issues over the debt ceiling again look likely to be raised in that month. "There are costs associated with going through this each time, costs embedded into Treasuries securities, costs the Treasury has to incur in higher risk premiums at auction," Rob Toomey, associate general counsel at the Securities Industry and Financial Markets Association (SIFMA), said on a call with reporters on Wednesday. Wrangling over the debt ceiling and reduced activity from the partial government shutdown are seen as harming the economy, creating more uncertainty over when the Federal Reserve is likely to begin paring back its $85 billion a month bond purchase program. Most market participants had expected the Fed to announce it would reduce purchases in its September meeting, though now many expect it won't happen until next year. "As time goes on, this gets further and further pushed back. If they couldn't do it when the market has priced it in, then when are they going to do it," said Tom Tucci, head of Treasuries trading at CIBC in New York. The Fed bought $1.46 billion in bonds due from 2036 to 2043 on Wednesday as part of its ongoing purchase program. It will buy between $2.75 billion and $3.50 billion in notes due between 2020 and 2023 on Thursday. Benchmark 10-year notes gained 14/32 in price to yield 2.68 percent on Wednesday. The yields have dropped from 3.00 percent before the Fed surprised investors with its decision not to pare back purchases. Rates on Treasuries bills maturing on February 13 increased as high as 0.14 percent on Wednesday, up from 0.05 percent on Friday. Yields on bills due on Oct 24 fell to 0.26 percent in highly volatile trading, after getting as high as 0.72 percent earlier on Wednesday. The Treasury also sold $20 billion in new one-month bills and $22 billion in one-year debt on Wednesday to relatively light demand. The delay in raising the debt ceiling has given short-dated Treasuries a rare star turn in the market, where traders are more normally focused on longer-term notes and bonds. "Never before in my career have I spent so much time looking at the bill curve," said Paul Montaquila, fixed income investment officer with Bank of the West and BNP Paribas Securities Corp. "Bills were trading like tech stocks." With a deal to reopen the government now seen as likely, traders are focusing on when the government may again release economic data that has been delayed by the shutdown, including the closely-watched employment report for September.