TREASURIES-Bond prices rise on U.S. debt ceiling jitters
* Fitch warns of U.S. downgrade on debt limit standoff
* Treasury bill rates "invert" on default risk
* Bonds gain on Fed officials' remarks about asset purchases
* Cost to insure Treasuries highest since early October
By Richard Leong
NEW YORK, Jan 15 (Reuters) - U.S. Treasury debt prices rose on Tuesday as traders turned their focus on a looming fight in Washington to raise the federal debt ceiling, stoking a safety bid for government debt despite the risk of a federal default.
Bond prices were also boosted by the Federal Reserve's purchase of bonds as part of its efforts to stimulate the economy, along with remarks by Federal Reserve Chairman Ben Bernanke that indicated the Fed will continue with the asset purchases.
"There's fear about the debt ceiling debate. We are running out of days to deal with it," said David Keeble, global head of
interest rates strategy at Credit Agricole Corporate & Investment in New York.
While a U.S. default would damage the long-term appeal of its debt to investors and foreign governments, traders were more worried about such an event paring appetite for stocks and risky investments and taking a toll on the global economy.
The U.S. Treasury cautioned on Monday the United States was on track to exhaust its options to meet its debt obligations between mid-February and early March.
The risk that the Treasury debt maturing during this period might not be repaid on time to debtholders has driven up the interest rates on these issues higher than those of T-bills that mature in April and later, resulting in an "inversion" of T-bill rates.
U.S. President Barack Obama and Republican lawmakers are expected to enter a tough round of negotiations over spending cuts, just weeks after they hammered out a deal that averted steep tax hikes.
Fitch Ratings warned on Tuesday that the United States faces a "material risk" of losing its top AAA-rating if there is a repeat of the political wrangling over the debt ceiling seen in 2011. Standard & Poor's downgraded the United States' rating in August 2011 after the first fight between Obama and Republicans over the debt ceiling.
Most investors expected the U.S. debt ceiling will be raised to avert a default, although a deal will likely come down to the wire.
Benchmark 10-year notes rose 3/32 in price at 98-3/32 with their yields at 1.838 percent. The 10-year yield flirted with a two-week low at 1.81 percent earlier, compared with $1.847 percent late on Monday.
Thirty-year bonds climbed 5/32 to 94-18/32 with their yields falling to 3.027 percent from 3.035 percent on Monday.
There was brief profit-taking in Treasuries earlier after the Commerce Department reported U.S. retail sales rose 0.5 percent in December, topping estimates.
WORRIES ABOUT RISK APPETITE
The interest rates on some Treasury bills have risen on the growing risk that Congress might not increase the debt ceiling and that the holders of these T-bills might not be repaid on time.
The rates on T-bills that mature in late February to early March when the government is set to reach its borrowing limits were running at 0.10 to 0.11 percentage point, double the levels on rates on T-bills due in January.
In the credit default swap market, the five-year cost to insure U.S. Treasuries rose to 0.43 percentage point, the highest level since early October but still some 0.20 point below the level seen during summer 2011, according to data firm Markit.
A possible U.S. default would likely accompany a round of federal budget cuts, known as sequestration, that would hurt the domestic economy.
"A lack of resolution might result in the sequester going through, which would be a bigger fiscal drag than is priced in now; and if growth is slower, that's positive for Treasuries," said Thomas Graff, fixed-income portfolio manager at Brown Advisory in Baltimore, Maryland.
Bond prices also were bolstered after Bernanke in an address on Monday offered no sign that the Fed would curb its aggressive bond purchases.
On Tuesday, the president of the Minneapolis Fed, Narayana Kocherlakota, called for the Fed to keep rates low until unemployment is a more "normal" 5.5 percent.
Boston Fed chief Eric Rosengren told Reuters the U.S. central bank would buy bonds into early 2014 if the job market conditions warrant more stimulus.
As part of its $45 billion monthly purchases of government securities aimed to help the economy, the Fed bought $927 million in Treasuries that mature from February 2023 to February 2031.
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