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US bonds rise as Washington contest spurs safety bid

Bonds: U.S. Treasurys Chart

U.S. Treasurys prices rose and yields eased on Thursday as an ongoing contest in Washington that has shut much of the government and left the debt ceiling problem unresolved inspired investors to buy U.S. debt, still the most viable safe haven.

Given the gridlock over the budget and healthcare reform that led to a partial government shutdown that began on Tuesday, investors are increasingly worried the lawmakers will not agree on a deal to increase the statutory $16.7 trillion borrowing limit by the Oct. 17 deadline.

Failure to increase the debt ceiling, they fear, would unleash market chaos and damage the long-term creditworthiness of the U.S. government and the safe-haven status of the dollar.

"At this point, the market seems to have a pretty high degree of confidence the Treasury will not miss or delay a principal or interest payment—that other things will give before that gives," said Robert Tipp, chief investment strategist at Prudential Fixed Income, with $400 billion in assets under management, in Newark, New Jersey.

"But if that assumption comes into question you will see the orderly repricing that is going on right now become disorderly," he said. "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."

As concerns over a possible U.S. default have intensified, the cost to insure Treasurys has soared in the credit default swaps market, though analysts qualify that by noting that that market is not particularly broad or deep.

Economic data took a back seat to worries about the political fighting in Washington.

The U.S. Labor Department said jobless claims totaled 308,000 in the week ended Sept. 28, compared with an upwardly revised 307,000 in the previous week. Economists had projected the latest figure to have risen to 313,000.

This was the last government economic report until the partial shutdown ends.

Meanwhile, 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.

Benchmark 10-year Treasury notes were up 5/32 in price with a yield 2.605 percent.