TREASURIES-Prices gain as U.S. govt shutdown seen hurting economy

Reuters

(Corrects timing of one-month bill auction in second to last

paragraph)

* U.S. shutdown seen hurting economy, delaying Fed tapering

* One-month T-bill yields rise in debt ceiling fears

* Fed buys $3.15 billion of notes due 2021-2023

* Treasury to sell $64 billion in 3-, 10- and 30-year debt

this week

By Karen Brettell

NEW YORK, Oct 7 (Reuters) - U.S. Treasuries prices gained on

Monday as lawmakers in Washington showed no progress towards

ending a partial government shutdown, raising concerns about its

impact on economic growth, and on concerns over the looming

showdown over raising the country's $16.7 trillion debt ceiling.

The government moved into the second week of a shutdown on

Monday with no end in sight. Many U.S. economic

releases, including crucial monthly payrolls data that had been

scheduled for last Friday, have been delayed by the shutdown.

"The uncertainty in Washington is the clearest touchstone

for the push towards Treasuries prices going higher; obviously

the longer that the government is shut down, the more damaging

it potentially becomes for the economy," said Ian Lyngen, senior

government bond strategist at CRT Capital in Stamford,

Connecticut.

Investors are also focused on the release on Wednesday of

minutes from last month's Federal Reserve policy meeting, which

could reveal more about why the U.S. central bank shocked

markets by deciding not to begin reducing its $85 billion a

month bond-purchase program.

The longer the shutdown lasts, the less likely the Fed is to

begin cutting back on bond purchases, especially as it is unable

to view government-issued data to gain a sense of the strength

of the economy.

"The longer this goes on, the weaker the economic data will

be, and that will probably push a tapering of quantitative

easing further out, from 2013 to 2014," said Gary Pollack, head

of fixed income trading at Deutsche Bank Private Wealth

Management in New York.

Benchmark 10-year notes were last up 8/32 in

price to yield 2.62 percent, down from 2.65 percent late on

Friday. The yields have dropped from 3.00 percent, the highest

in over two years, on Sept. 6.

Squabbling over raising the country's debt ceiling was also

hurting riskier assets such as stocks, which may have added a

bid to Treasuries.

Republican House Speaker John Boehner vowed on Sunday not to

raise the U.S. debt ceiling without a "serious conversation"

about the country's rising debt levels, while Democrats said it

was irresponsible and reckless to raise the possibility of a

U.S. default.

Most market participants see the United States as very

unlikely to miss payments on its debt, because a default would

likely have severe consequences, disrupting short-term funding

and collateralized markets that are backed by Treasuries, and

potentially creating broad aversion to U.S. debt that would

raise the country's borrowing costs.

Some investors are nonetheless avoiding shorter-dated bills

that are most at risk of any delay in being repaid, and fears

that the increasingly divided Congress will be unable to come to

a solution may increase over the coming weeks.

One-month Treasuries bills are yielding 0.13

percent, higher than three-month and six-month

bills, which pay 0.02 percent and 0.04 percent,

respectively.

U.S. Treasury Secretary Jack Lew has warned Congress the

United States would exhaust its borrowing capacity no later than

Oct. 17, at which point it would have only about $30 billion in

cash on hand.

The Treasury said on Monday it will sell $30 billion in

four-week bills on Tuesday, $5 billion less than its previous

four-week sale. Some investors have worried that falling

issuance as the U.S. approaches the debt ceiling may create some

shortages of Treasuries collateral to back trades.

The Fed bought $3.15 billion in notes due from 2021-2023 on

Monday as part of its ongoing purchase program. The Treasury

will sell $64 billion in new three-, 10- and 30-year bonds this

week.

(Editing by Chizu Nomiyama and James Dalgleish)

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