* US to sell $35 bln 5-year notes after solid 2-year sale
* US 1-year CDS jumps to record on Washington stalemate
* Investors see US default remote, likelihood of downgrade
* Surprise durables drop fuels view of wobbly U.S. economy (Updates throughout, adds quote, byline)
By Richard Leong
NEW YORK, July 27 (Reuters) - U.S. Treasuries prices weakened on Wednesday, as traders prepared room for $35 billion of fresh five-year note supply with no sign that Washington will reach a deal to raise the debt ceiling any time soon.
In the latest development, a Republican plan to cut the U.S. deficit faced delay and stiff opposition, piling anxiety onto investors and ordinary Americans hoping for a late compromise to avoid a crippling debt default. [ID:nN1E76P2HJ]
Wall Street, however, is clinging to the view that a U.S. default is remote even as investors have increasingly come to believe that the world's largest economy could lose its coveted top-notch credit rating before the summer.
"A U.S. downgrade had already been priced in some parts of the market," said Charles Retzky, director of futures sales at Mizuho Securities USA in Chicago.
Bets that bond rating agencies would downgrade the United States have been expressed in the credit default swap market where the cost to insure U.S. Treasuries for a year soared to a record high.
Worries over lower rated Treasuries have not hurt the demand for the issuance of Treasury supply so far. This signaled investors are not shunning U.S. government debt, given the lack of alternatives to park their cash given the economic risk and the European debt crisis.
On Wednesday, the Treasury Department will sell $35 billion of five-year notes, following a relatively solid $35 billion auction of two-year debt on Tuesday. It will sell $29 billion of seven-year notes on Thursday.
Prior to the five-year auction, it will offer $12 billion in five-day cash management bills which will mature on Aug. 2 when the Treasury has said the federal government will run out of funding options. The Treasury has used various methods to raise cash since the statutory $14.3 trillion borrowing limit was reached back in May.
While the U.S. debt-ceiling standoff continues, the latest data signaled the U.S. economy is wobbly due to a struggling housing market and high unemployment.
The Commerce Department on Wednesday said durable goods orders unexpectedly fell 2.1 percent, weighed down by weak receipts for transportation equipment, after a 1.9 percent increase in May. For more, see [ID:nN1E76Q09V]
The benchmark 10-year Treasury note US10YT=RR traded 8/32 lower in price for a yield of 2.98 percent, up from 2.96 percent late Tuesday, while the 30-year bond US30YT=RR traded down 15/32 to yield 4.31 percent, up from 4.28 percent.
The spread between the yield on 10-year Treasuries and the yield on 10-year German Bunds EU10YT=RR grew to 32 basis points, the widest since February.
In the derivatives market, one-year U.S. CDS price rose to a record high 85 basis points, up 8 basis points on the day, while 5-year U.S. CDS increased 3 basis points at 62 basis points, a level not seen since February 2010, according to data firm Markit. (Editing by Theodore d'Afflisio)