* Soured consumer mood raises worries about spending
* U.S. default threat could actually boost Treasuries
* European bank test results not as dismal as feared
* Above-forecast core U.S. inflation damps chances of QE3 (Updates market action, adds details, links, quotes)
By Richard Leong
NEW YORK, July 15 (Reuters) - U.S. Treasuries prices rose modestly on Friday as sovereign debt problems on both sides of the Atlantic and worries over a faltering U.S. economy revived safe-haven demand for U.S. government debt.
The gridlock in Washington over reaching a deal to cut the deficit and raise the $14.3 trillion debt ceiling has done little to reduce the appeal of Treasuries, at least for now -- and despite debt downgrade warnings from Moody's Investors Service and Standard & Poor's in the past 48 hours.
The two major ratings agencies warned they will strip the United States, the world's biggest economy, of its top-notch credit rating if it does not increase its borrowing limit to avoid a default.
"Everything that's bad is good for Treasuries even if there's a default," said Thomas Roth, executive director of U.S. government bond trading at Mitsubishi UFJ Securities USA Inc in New York.
There is a growing, though far from consensus, view that while a United States default would hurt the credit-worthiness of Treasuries, it would devastate stocks and risky investments even more, making investors scramble for Treasuries to store cash.
"Treasuries look the best of a bad lot. The U.S. will make good on its payments despite a short-term disruption," said Anthony Valeri, fixed income strategist at LPL Financial in San Diego, which manages $280 billion in assets.
Other analysts were far gloomier.
"We are long-term pessimistic on the United States," said George Feiger, chief executive officer of Contango Capital Advisors in San Francisco, which oversees $3.4 billion.
S&P threatened on Friday to downgrade mortgage finance agencies Fannie Mae FNMA.OB and Freddie Mac FMCC.OB and some financial companies if it removes the United States' AAA-rating. For details see [ID:nN1E76E1AK].
The yield spreads on Fannie's and Freddie's debt versus Treasuries widened a smidge on the S&P announcement.
While the tension in Washington continues over the debt ceiling, the results of bank stress tests from Europe reduced fears over the region's fiscal problem on its banking system. The less dismal results briefly pared bids for Treasuries.
The European Bank Authority said eight of 90 European banks failed its capital stress test and they need to raise 2.5 billion euros in capital. [ID:nL9E7G9005]
"It's a relief not more banks failed," Roth said.
Benchmark 10-year Treasury notes US10YT=RR were trading 13/32 higher in price to yield 2.91 percent, down from 2.96 percent late Thursday. Benchmark yields on Tuesday had dipped to 2.82 percent, the lowest in seven months, due to worries over contagion from the debt crisis in Europe.
Treasuries performed a tad better than German Bunds. The spread between 10-year Treasuries and 10-year Bunds EU10YT=RR narrowed to 20 basis points from 21 basis points on Thursday and were unchanged on the week.
On the U.S. economic front, a private report stoked worries that a deterioration in consumer sentiment will erode spending and tip the economy into another recession two years after recovering from the worst downturn in 70 years.
Thomson Reuters/University of Michigan's index of consumer sentiment fell its lowest since March 2009. [ID:nN1E76E0DF]
In other trading, yields on other Treasuries maturities were down by between 1 and 6 basis points from Thursday.
The 30-year bond US30YT=RR ended up 5/32 after erasing a one-point drop. Its yield finished at 4.25 percent, up 1 basis point from Thursday. (Additional reporting by Chris Reese and Karen Brettell; Editing by James Dalgleish)