TREASURIES-Stock losses, possible government shutdown feed bid
* Stocks losses, possible government shutdown feed safety bid
* August personal income +0.4 percent, spending +0.3 percent
* New York Fed President William Dudley speaking at 2 p.m. (1800 GMT
By Ellen Freilich
NEW YORK, Sept 27 (Reuters) - U.S. Treasuries prices rose on Thursday as stock market losses and concerns about the implications of a U.S. government shutdown fed a bid for U.S. debt.
U.S. stocks fell at the open, with the S&P 500 and Dow poised to drop for the first week in four, as concerns grew over a lack of compromise in debt and budget negotiations by congressional lawmakers in Washington.
The government's report that U.S. personal income rose 0.4 percent in August while personal spending rose 0.3 percent - matching consensus forecasts - elicited no discernible market reaction. The core PCE price index rose 0.2 percent, slightly above the consensus forecast of 0.1 percent, but the year over year rate remained at 1.2 percent, below the Fed's target.
"Consumer spending and PCE inflation this morning are not telling the Fed they need to taper any time soon," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ, referring to the debate over when the U.S. central bank might cut back on the large-scale purchases of Treasuries and mortgage-backed securities it has been making in an effort to stimulate economic activity and lower unemployment.
RBS Securities head Treasury strategist William O'Donnell said Treasuries rebounded from overnight lows despite strong business and economic confidence measures in Europe and strong home price data out of the UK.
The seven-year Treasury notes sold on Thursday - in the last of the Treasury's three coupon auctions this week - led the rebound, he said.
Increased concerns about a downgrade in Italian debt and disappointing five- and 10-year Italian debt auctions also supported the bid for U.S. government debt, O'Donnell said.
Italy's Treasury dismissed market talk of an imminent sovereign downgrade, however, saying it had no advance notice from ratings agencies as is customary before such a move.
Italian bonds are under pressure due to rising political tensions in the country's fragile coalition government, but traders also cited rumors of a sovereign downgrade they said could come as early as after market close on Friday as a cause for the selling.
Benchmark 10-year Treasury notes were up 7/32, their yields easing to 2.63 percent from 2.65 percent late on Thursday. Five-year notes rose 5/32 in price, their yields eased to 1.41 percent from 1.44 percent late on Thursday.
Treasuries prices have risen and yields fallen since the Federal Reserve decided to put off unwinding any of its monetary accommodation until it had more confidence in the sustainability of the still-subdued economic recovery.
At its policy meeting last week, the Fed decided not to trim its large-scale asset purchases, citing strains in the economy from tight fiscal policy and higher mortgage rates. Fewer asset purchases would put downward pressure on bond prices and upward pressure on yields.
Still, plenty of uncertainty lies ahead, including whether or not the non-farm payrolls report can be released on time next Friday if the government shuts down on Oct. 1 should budget negotiations on Capitol Hill result in an impasse.
In addition, unless Congress raises the debt ceiling by Oct. 17, the Treasury will only have $30 billion in cash on hand, leaving the United States on the edge of an unprecedented default, the Treasury said on Wednesday.
Steve Van Order, fixed-income strategist with Calvert Investments in Bethesda, Maryland, said the wrangling in Washington could continue until stock investors get nervous and the stock market sells off sharply.
"That's usually the signal to politicians to scramble and do something," he said.
"We think the volatility risk is shifting more toward stocks now and for buyers of corporate debt, that could offer some opportunities if spreads widen out a bit," he said.