Treasury 10-year note prices rose Wednesday, pushing yields to the lowest level in six weeks, on speculation U.S. budget talks may lead to a government shutdown.

U.S. government debt remained higher as the Treasury sold $35 billion in five-year notes to the most demand in four months. Benchmark 10-year notes gained earlier after Treasury Secretary Jacob J. Lew said investor confidence a deal can be struck to raise the debt limit is “a bit greater than it should be” and the government will probably have less than $50 billion in cash by mid-October. The U.S. will sell $29 billion of seven- year debt Thursday.

“We continue to see a market being driven by what’s going on in Washington,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “That angst in the marketplace is driving Treasury prices higher. The auction seemed to be a decent, but not a blowout.”

The benchmark U.S. 10-year yield declined four basis points, or 0.04 percentage point, to 2.61 percent at 3:04 p.m. New York time, according to Bloomberg Bond Trader prices. It touched the lowest since Aug. 12. The price of the 2.5 percent security due in August 2023 added 3/8, or $3.75 per $1,000 face amount, to 99 1/32.

Market Performance

The Bloomberg U.S. Treasury Bond Index has fallen less than 0.1 percent since the end of June, heading for a fourth quarterly decline. It gained 0.8 percent in September, leaving it down 2.5 percent for 2013.

“The market has had a good tone, and nothing’s changed out of Washington,” said David Ader, U.S. government bond-strategy head at CRT Capital Group LLC in Stamford, Connecticut. “We’re being held hostage to the debt-ceiling debate, timing and outcome. We will get through it. There won’t be a default, but potentially we could see the government shut down.”

The notes sold Wednesday drew a yield of 1.436 percent, compared with a forecast of 1.422 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount sold, was 2.67, the highest since the May auction.

The debt sold Wednesday will be classified as an additional issue of the outstanding seven-year notes sold on Sept. 30, 2011, the Treasury said, as the coupon rate was set at 1.375 percent, matching the level for the notes sold two years ago.

Auction Detail

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11.8 percent of the notes, compared with an average of 15.6 percent at the past 10 offerings.

Five-year notes have lost 1.9 percent this year. This week’s three auctions total $97 billion. The U.S. sold $33 billion in two-year debt yesterday at a yield of 0.348 percent.

The sales this week, along with last week’s $13 billion 10- year Treasury Inflation Protected Securities auction, will raise $47.7 billion of new cash, as maturing securities held by the public total $62.3 billion, according to the Treasury.

Investors bid $2.88 for each dollar of the $1.589 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

Budget Process

The Senate advanced a stopgap spending measure by a vote of 100-0, with 60 votes required. The bill was initially passed Sept. 20 by the House of Representatives to cover federal spending through Dec. 15.

Before sending the measure back to the House, Senate Democrats plan to strip language from the House measure that would choke off funding for the 2010 health-care law. House Republicans are demanding the defunding of President Barack Obama’s health-care law as the price for a temporary measure to keep the government open.

“It’s one more reason why the Fed won’t be able to do anything in the short term because they may not have any data,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There’s the potential of that creating a statistical drag through omission.”

The deadline for action is Monday, Sept. 30, when the federal fiscal year ends. Obama has said he won’t accept the condition, setting up the possibility of a government shutdown if the issue isn’t resolved on time.

Debt Limit

Republicans also are imposing a series of conditions, including concessions on government spending levels and a revamp of the tax code, to raise the nation’s $16.7 trillion debt limit, which U.S. Treasury officials say they expect to exhaust as soon as mid-October.

Treasury bills maturing close to the deadline for raising the borrowing ceiling were little changed. Rates on bills due on Oct. 24 were 0.015 percent, compared with 0.005 percent two weeks ago. The rate on bills due Oct. 31 has held within two basis points of zero during the period.

The Fed buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs. It purchased $3.16 billion in Treasuries today maturing between November 2020 and August 2023. It refrained from tapering the buying after its Sept. 17-18 meeting, saying it needs more evidence of lasting improvement in the economy.

Twenty-four of 41 economists surveyed by Bloomberg on Sept. 18-19 said the Fed won’t take the first step in slowing its bond purchases until December.