TREASURIES-U.S. bonds fall as investors await Washington breakthrough


* U.S. 1-month T-bill rates highest since November

* Treasuries CDS prices nearing 2011 debt fight levels

* U.S. jobless claims little changed in latest week

By Richard Leong

NEW YORK, Oct 3 (Reuters) - U.S. Treasuries prices slippedon Thursday as investors moved to the sidelines, awaiting abreakthrough in Washington to end the first government shutdownin 17 years.

The bond market brushed off encouraging news at home andabroad, suggesting the global economy is rolling along, albeitat a sluggish pace.

"People are just keeping their cards close to the vests asthey keep an eye on what's going on with the politicians inWashington," said Larry Milstein, head of agency and governmenttrading at R.W. Pressprich & Co. in New York.

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

Failure to increase the debt ceiling, they fear, wouldunleash market chaos and damage the long-term creditworthinessof the U.S. government and the safehaven status of the dollar.

"The debt ceiling is a much greater concern," Milstein said.

As concerns over a U.S. default have intensified, the costto insure Treasuries has soared in the credit default swapsmarket.

Investors would pay about 46,000 euros to insure 10 millioneuros worth of Treasuries for a year on Thursday, according toMarkit. This was the highest premium on one-year U.S. sovereigndebt since July 2011 during the first debt ceiling showdownbetween President Barack Obama and top Republican lawmakers.

Interest rates on Treasury bills that will come due betweenthe debt ceiling deadline and the end of October also rose ondefault worries. The rate on the T-bill issue due Oct. 31 touched 0.17 percent, the highest level sinceNovember. This compared with the 0.03 percent on the T-bill duethe following week.

A stabilization in Wall Street stock prices, in themeantime, curbed bids for longer-dated bonds.

Benchmark 10-year Treasury notes were down 3/32in price with a yield 2.63 percent, up 1 basis point from lateon Wednesday but still close to a seven-week low.

Economic data took a backseat to worries about the politicalfighting in Washington.

The U.S. Labor Department said jobless claims totaled308,000 in the week ended Sept. 28, compared with an upwardlyrevised 307,000 in the previous week. Economists had projectedthe latest figure to have risen to 313,000.

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

While the standoff has forced up to a million federalworkers into furlough and reduced non-essential services, somebranches of government, including the Federal Reserve, haveremained open.

The Fed plans later to buy $1.25 billion to $1.75 billion inTreasuries that mature between February 2036 and August 2043,part of its intended $45 billion in overall government debtpurchases in October.

Also, San Francisco Fed President John Williams, Atlanta FedPresident Dennis Lockhart, Dallas Fed President Richard Fisherand Fed Governor Jerome Powell will make public appearanceslater Thursday.

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