* U.S. lawmakers in last-ditch effort to raise debt ceiling

* Treasury to sell $20 billion in one-month bills

US1MTWI=TWEB

* Treasury to sell $26 billion in 189-day cash management bills

* Treasury to sell $22 billion in one-year bills

US1YTWI=TWEB

By Ellen Freilich

NEW YORK, Oct 16 (Reuters) - Interest rates on U.S. Treasury bills that mature in the next two weeks fell on Wednesday as lawmakers began a down-to-the-deadline effort to raise the debt ceiling, lifting investors' confidence that a deal could be reached.

As the $16.7 trillion statutory borrowing limit loomed, investors had hesitated to buy Treasury bills due in the latter half of October in case of a default.

"Dealers were avoiding the sector and clearing banks were unwilling to finance a paper that matures before year end, causing a fairly chaotic environment," said Thomas di Galoma, co-head of fixed income rates at ED&F Man Capital.

The impact of the unresolved debt ceiling issue was felt early on in the repo market as well, where the general collateral repo rate briefly rose to the highest level since last year.

But new hopes for a deal reversed those trends and short T-bill rates fell "in anticipation of a deal," di Galoma said.

The short end of the maturity curve will also be tested as the Treasury sells a total of $68 billion in T-bills on Wednesday: $20 billion in one-month bills US1MTWI=TWEB , $26 billion in 189-day cash management bills and $22 billion in one-year bills US1YTWI=TWEB .

After a day of stop-and-go negotiations, the top Democrat and Republican in the U.S. Senate were said to be close to agreeing on a proposal to raise the debt limit - and reopen the partially shuttered government - for consideration by the full Senate later on Wednesday.

But the measure's fate remained uncertain in the fractured Republican-controlled House of Representatives, which failed twice Tuesday to produce its own plan.

The Senate was scheduled to meet at noon (1600 GMT), and the House at 10 a.m. (1400 GMT).

On Wall Street, the stock market rallied on hopes for a deal that would extend U.S. borrowing authority until Feb. 7 and fund government agencies until Jan. 15, ending a partial government shutdown that began on October 1.

Uncertainty over Washington's ability to avert a default led Fitch Ratings to warn it could cut the sovereign credit rating of the United States from AAA, citing the political brinkmanship over raising the federal debt ceiling. ID:nL1N0I522J

"We have no real economic numbers to trade off of, and traders and investors are glued to their TVs, watching and waiting for some good news," said Kevin Giddis, senior managing director and head of fixed income capital markets at Raymond James.

"The middle to long end of the yield curve is remarkably calm. We can only hope that the confidence that the bond market is showing translates into a deal," he said.

Benchmark 10-year Treasury notes US10YT=RR were down 5/32 in price, with their yield rising to 2.75 percent from 2.73 percent late on Tuesday.

Interest rates on T-bills due on Oct. 24 and Oct. 31

912796BG3= 912796BH1= rose in early dealings, but then eased somewhat on hopes a deal would be reached to avert default.

The yield on a two-year Treasury note that matures at the end of October and was issued in 2011 912828RN2= last stood at

0.7640 percent.

The Federal Reserve Bank of New York's open market desk is conducting an outright purchase operation this morning in the February 2036 through August 2043 sector of the nominal Treasury curve as part of the Fed's large-scale purchases aimed at stimulating the economy and lowering unemployment. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic

Upcoming U.S. debt payments http://link.reuters.com/daf83v

U.S. 2-year yield jumps http://link.reuters.com/fuf83v

U.S. T-bill yields http://link.reuters.com/wet63v

U.S. debt ceiling http://link.reuters.com/zyq43v

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> The

(Reporting By Ellen Freilich; Editing by Chris Reese)

((ellen.freilich@thomsonreuters.com)(+1 646 303 6313)(Reuters)(Messaging:)(ellen.freilich.thomsonreuters.com@tho msonreuters.net)) 

 ((-------MARKET SNAPSHOT AT 10:20 a.m. EDT (1420 GMT)-------)) Dec T-Bond  
  USZ3
              131-27/32  (-10/32)           Dec 10-Year note  
  TYZ3
        125-19/32  (-09/32)                                                  Change vs    Current                                           Nyk        yield One-month bills   
  US1MT=RR
    0.350      ( unch)     0.355 Three-month bills 
  US3MT=RR
    0.125      (+0.020)    0.127 Six-month bills   
  US6MT=RR
    0.140      (+0.070)    0.142 Two-year note  
  US2YT=RR
       99-25/32   ( unch )    0.367 Five-year note  
  US5YT=RR
      99-18/32   (-04/32)    1.468 10-year note   
  US10YT=RR
      97-28/32   (-04/32)    2.749 30-year bond   
  US30YT=RR
      97-00/32   (-02/32)    3.793                                     ))

Keywords: MARKETS USA BONDS/