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U.S. 5-year CDS tighter but one-yr holds at 2-year high

LONDON, Oct 10 (Reuters) - The cost of insuring five-year U.S. bonds against default dipped on Thursday on signs of some progress in U.S. debt talks but shorter-term rates remained at their highest in over two years on doubts a breakthrough was imminent.

Five-year credit default swaps tightened 4 basis points on the day to 40 bps, according to data provider Markit, meaning it costs $40,000 a year to insure against a U.S. default using a five-year CDS contract.

One-year CDS was flat at 68 bps - its highest since July 2011 - and keeping its gap above the five-year rate at 28 bps, its widest in over two years. In normal circumstances, it is costlier to buy longer-term credit protection. The current curve inversion - considered a classic sign of credit stress - reflects investors' concern over a looming default.

Although markets still think a deal will be done, investors have started facing up to the possibility that a stalemate on talks to raise Washington's borrowing limit could extend to Oct. 17, when the government will effectively run out of cash.