TREASURIES-U.S. bonds gain on shutdown worries, jobs data

Reuters

* U.S. September private jobs growth misses forecast

* One-year U.S. CDS price rises to highest since 2011

* U.S. sells $20 billion in seven-day cash management bills

By Steven Norton

NEW YORK, Oct 2 (Reuters) - U.S. government debt prices roseon Wednesday as uncertainty about a protracted governmentshutdown and data suggesting sub-par job growth rekindledinvestor appetite for bonds and supported the view the FederalReserve will not reduce stimulus in the near future.

Investors also worried whether U.S. politicians can agree toincrease the statutory $16.7 trillion borrowing cap in time toavert a default, which traders fear would cause market chaos.

"The government shutdown is an appetizer for the maincourse, which will be dealing with the debt ceiling. So there'sa safety bid for Treasuries in light of those two debates," saidSusanna Gibbons, vice president and portfolio manager at RBCGlobal Asset Management in Minneapolis.

The first partial federal government shutdown in 17 yearsbegan on Tuesday due to a stalemate between Republicans andDemocrats over the federal budget and healthcare reform. As oflate Wednesday, there was little to indicate progress had beenmade on a deal that would restore government services and returnup to one million federal workers to their jobs.

U.S. benchmark 10-year Treasury notes gained9/32 in price for a yield of 2.62 percent, down from 2.65percent late on Tuesday. The 10-year yield hovered near aseven-week low set last week when traders added bond holdings inanticipation of the shutdown.

"Everything in Washington, both the shutdown and thepostponement of any resolution on the debt ceiling, is kind ofkeeping Treasuries in a range," said Jim Vogel, interest ratestrategist for FTN Financial in Memphis, Tennessee.

Data from payrolls processor ADP showed private employersadded 166,000 jobs in September, below the 180,000 projected byeconomists polled by Reuters. This compared with a downwardlyrevised 159,000 gain in August.

The lone U.S. economic indicator on Wednesday prompted abrief bond buying spree spurred by the downward revision, Vogelsaid, temporarily taking 10-year yields below 2.6 percent.

"We had that initial over-reaction, now it's a little bitmore normalized as we see that things are about where they werebefore the ADP report," said Brian Jacobsen, chief portfoliomanager for Wells Fargo Funds Management. "When that's all thedata that you've got, that's what you work with."

With federal agencies scaling back their operations, theLabor Department has said it will not release its monthlypayrolls report, originally scheduled for Friday, during theshutdown. This means traders will rely on privately produceddata to gauge the economy.

Economists have forecast that each week of a governmentshutdown would shave 0.1 percentage point from economic growth.Deutsche Bank said late Tuesday the growth reduction couldintensify to 0.2 percentage point a week if the shutdown lastslonger than two weeks.

On Wall Street, stocks closed down, with the benchmarkStandard & Poor's 500 index falling 0.07 percent.

The ADP report and the stalemate in Washington add to marketuncertainty over the growth of the economy and complicateforecasts on when the Federal Reserve will begin to draw downits stimulus. Analysts said a "taper" of any kind would likelycome toward the end of the year at the earliest, with othersprojecting a pullback in 2014.

As the U.S. economy showed moderate growth before thegovernment shutdown, it remains vulnerable to a possible federaldefault if the squabble between Democrats and Republicansprevents a deal to raise the debt limit, which is set to rundown on Oct. 17.

"When it comes to the debt ceiling, it will have graveimplications for the U.S. on its creditworthiness and creditrating," said Robbert van Batenburg, director of market strategywith Newedge USA LLC in New York.

Concerns over a U.S. default have risen in the creditdefault swaps market, where the cost to insure Treasuries hasjumped in recent days.

Investors would pay about 35,000 euros to insure 10 millioneuros worth of Treasuries for a year on Wednesday, according toMarkit. This was near the highest premium on one-year U.S.sovereign debt in two years, since the first debt ceilingshowdown between President Barack Obama and top Republicanlawmakers.

Interest rates on Treasury bills that will come due in thebetween the debt ceiling deadline and the end of October fellbut remained more elevated than other T-bill issues on defaultjitters. The rate on the T-bill due Oct. 31 slippedabout 1 basis point to 0.076 percent. This compared with the0.030 percent on the T-bill due the following week.

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