UPDATE 1-Treasury warns of wide impact if U.S. sanctions Russian debt -Bloomberg

-Bloomberg@ (Adds Russia market rally, congressional source comment on document)

WASHINGTON, Feb 2 (Reuters) - The U.S. Treasury Department said in a report submitted to Congress that expanding sanctions on Russia to include new sovereign debt would have "negative spillover effects" on global financial markets and businesses, Bloomberg reported on Friday.

"Given the size of Russias economy, its interconnectedness and prevalence in global asset markets, and the likely over-compliance by global firms to U.S. sanctions, the magnitude and scope of consequences from expanding sanctions to sovereign debt and derivatives is uncertain and the effects could be borne by both the Russian Federation and U.S. investors and businesses," said the report, which was submitted to Congress on Monday.

Russian government bonds, known as OFZs, rallied following the report on Treasury's position. Investors in OFZ bonds, popular among foreign market players thanks to their lucrative yields, have been on alert about new possible sanctions recently, buying into Russian debt pre-emptively due to fears of losing access to them in the future.

Sanctions against sovereign debt, the report said, could put downward pressure on Russian economic growth, increase the strain on the banking sector and "lead to Russian retaliation against U.S. interests," according to Bloomberg.

The report also warned that sanctions on sovereign debt could affect the "competitiveness of large U.S. asset managers," Bloomberg said.

A congressional source confirmed that the pages cited by Bloomberg are authentic but are part of a much larger classified memo sent to Congress. A Treasury spokesman did not immediately respond to questions about the document.

U.S. President Donald Trump's administration on Tuesday published a list of 210 Russians, including 96 so-called oligarchs worth $1 billion or more, as required under a sanctions law passed by Congress, but it did not immediately impose any new penalties on them.

The failure to impose any new sanctions drew criticism from Democrats, but Treasury Secretary Steve Mnuchin told lawmakers at a hearing on Tuesday that new sanctions would eventually be levied on Russia in response to Moscow's interference in the U.S. election. (Reporting by Katanga Johnson, Patricia Zengerle and Joel Schectman; Editing by Mary Milliken and Phil Berlowitz)