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

* 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 rose on Wednesday as uncertainty about a protracted government shutdown and data suggesting sub-par job growth rekindled investor appetite for bonds and supported the view the Federal Reserve will not reduce stimulus in the near future.

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

"The government shutdown is an appetizer for the main course, which will be dealing with the debt ceiling. So there's a safety bid for Treasuries in light of those two debates," said Susanna Gibbons, vice president and portfolio manager at RBC Global Asset Management in Minneapolis.

The first partial federal government shutdown in 17 years began on Tuesday due to a stalemate between Republicans and Democrats over the federal budget and healthcare reform. As of late Wednesday, there was little to indicate progress had been made on a deal that would restore government services and return up to one million federal workers to their jobs.

U.S. benchmark 10-year Treasury notes gained 9/32 in price for a yield of 2.62 percent, down from 2.65 percent late on Tuesday. The 10-year yield hovered near a seven-week low set last week when traders added bond holdings in anticipation of the shutdown.

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

Data from payrolls processor ADP showed private employers added 166,000 jobs in September, below the 180,000 projected by economists polled by Reuters. This compared with a downwardly revised 159,000 gain in August.

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

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

With federal agencies scaling back their operations, the Labor Department has said it will not release its monthly payrolls report, originally scheduled for Friday, during the shutdown. This means traders will rely on privately produced data to gauge the economy.

Economists have forecast that each week of a government shutdown would shave 0.1 percentage point from economic growth. Deutsche Bank said late Tuesday the growth reduction could intensify to 0.2 percentage point a week if the shutdown lasts longer than two weeks.

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

The ADP report and the stalemate in Washington add to market uncertainty over the growth of the economy and complicate forecasts on when the Federal Reserve will begin to draw down its stimulus. Analysts said a "taper" of any kind would likely come toward the end of the year at the earliest, with others projecting a pullback in 2014.


As the U.S. economy showed moderate growth before the government shutdown, it remains vulnerable to a possible federal default if the squabble between Democrats and Republicans prevents a deal to raise the debt limit, which is set to run down on Oct. 17.

"When it comes to the debt ceiling, it will have grave implications for the U.S. on its creditworthiness and credit rating," said Robbert van Batenburg, director of market strategy with Newedge USA LLC in New York.

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

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

Interest rates on Treasury bills that will come due in the between the debt ceiling deadline and the end of October fell but remained more elevated than other T-bill issues on default jitters. The rate on the T-bill due Oct. 31 slipped about 1 basis point to 0.076 percent. This compared with the 0.030 percent on the T-bill due the following week.