* Improvement expected in Reuters/U Michigan sentiment index
* Position-squaring could emerge before three-day weekend
By Ellen Freilich
NEW YORK, Jan 18 U.S. government debt prices rose on Friday as debate about raising the nation's debt ceiling prompting investors to buy securities cheapened by this week's stronger-than-forecast economic data.
A strong report on the housing sector and a drop in new claims for unemployment insurance cut Treasuries prices on Thursday and overnight, slightly better-than-expected data on China's growth lifted 10-year yields nearly to 1.90 percent, making them more appealing to buyers.
The risk, however slim, that the United States might default if it does not raise its borrowing limit in the next few weeks is likely to keep buyers ready to respond to any price cuts, analysts said.
That's because investors really see the U.S. debt ceiling tussle as a temporary problem and regard the U.S. debt market as one of the safest places for investors to park cash.
Republicans in the U.S. House of Representatives have signaled they might support a short-term extension of U.S. borrowing authority next month so they can move on to other budget battles.
"Treasuries are reversing a portion of yesterday's pullback ahead of a generally quiet calendar and a three-day weekend," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
Benchmark 10-year Treasury notes were up 8/32 to 97-31/32 on Friday, their yields easing to 1.85 percent from 1.88 percent late on Thursday.
"The underlying story is that the U.S. is recovering and the recovery is gaining in strength ... but the fiscal policy uncertainty is holding it back at the moment," Rabobank strategist Philip Marey said.
The Reuters/University of Michigan consumer sentiment index due at 9:55 a.m. EST (1455 GMT) is expected to fit the recent trend of stronger data.
High Frequency Economics economists said the fiscal cliff deal likely prompted "at least a modest bounce" in the sentiment index. A Reuters poll predicted the preliminary January index would read 75.0, up from 72.9 in December.
The cost to insure U.S. Treasuries against default was holding at its level since August 2011 early Friday, prompted by worries that Congress would not raise the debt ceiling in time to repay debt that matures as early as late February.
The price on the five-year credit default swap on U.S. government debt was last quoted at 44 basis points, compared with 43 basis points late on Thursday, according to data firm Markit.
During a debt ceiling standoff in the summer of 2011, the five-year USA CDS price rose as high as 63 basis points. The five-year CDS price on U.S. government debt is higher now than that on German Bunds, which was last seen a month ago.