LONDON, Oct 7 (Reuters) - Low-risk euro zone bonds inched up on Monday, with investors nervous about the lack of progress in resolving the U.S. budget standoff as a mid-October deadline for raising Washington's debt ceiling approaches.
Markets have so far taken the first U.S. government shutdown in 17 years - now in its seventh day - in their stride, focusing on the fact that it is likely to delay any Federal Reserve plans to begin scaling back its bond-buying programme.
But ultra short-term Treasury bill yields hovered near 10-month highs on Friday on increasing concerns about the possibility of a U.S. government default.
Neither side in the U.S. budget fight seems to be budging. Republican House Speaker John Boehner vowed on Sunday not to raise the U.S. debt ceiling without a "serious conversation" about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a default.
"That's what's underpinning the bid - a bit of cold, hard reality about the state of the debate in the U.S. on raising the debt ceiling," Marc Ostwald, strategist at Monument Securities said.
But he said the market impact remained subdued.
"If the market was genuinely reacting, actually started to believe in a default, then the equity market would be falling like a stone and there would be even more pressure at the front end of the U.S. curve," he said.
German Bund futures rose 25 ticks to 140.21, pushing 10-year German yields 2.1 basis points lower to 1.81 percent.
Yields on 10-year bonds issued by highly rated France, the Netherlands, Belgium and Austria were down one to two basis points.
"Everything seems to be up marginally. Probably the debt ceiling has got something to do with it in that the bigger the impasse, the more the growth outlook gets diminished. I think that's probably the reason why Treasuries and Bunds are up a bit," one trader said.
Ten-year U.S. Treasury yields were 2.2 basis points lower at 2.62 percent. Concerns over default are mostly affecting the very short end of the U.S. Treasury curve.
"Probably for peripherals it's just the overhang from last week's resolution of Italy and so on," he added.
Ten-year Italian government bond yields fell two basis points to 4.30 percent after the government won a confidence vote in parliament last week and a Senate Committee recommended Silvio Berlusconi be expelled from the Senate after a tax fraud conviction.
Ten-year Spanish government bond yields were one basis point lower at 4.21 percent.
The Portuguese equivalent was up slightly at 6.47 percent, having hit their lowest in over a month on Friday after international lenders approved the country's performance under a bailout in their latest review.
"We are in a period where there is little value in the Bund below 1.80 (percent). There are some limited upward pressures on yields driven by some better economic data as well as recent constructive developments in peripheral markets such as the review of the Troika in Portugal," said Patrick Jacq, European rate strategist BNP Paribas.