The world’s biggest investors are finding U.S. government bonds becoming safer, not more risky, as the deadline to avoid the first American default approaches.

The yield on 10-year U.S. bonds dropped to a two-month low of 2.58 percent on Oct. 3, after Treasury Secretary Jacob J. Lew said the government won’t be able to pay its debts in 14 days unless Congress raises the $16.7 trillion borrowing ceiling. While short-term bill rates and the cost to insure against a default have risen, volatility in Treasuries has fallen, a sign that investor confidence in the Federal Reserve is outweighing worries over the budget battle among U.S. political leaders.

BlackRock Inc. Chairman and Chief Executive Officer Laurence D. Fink and Pacific Investment Management Co. Co-Chief Investment Officer Bill Gross, who lead the world’s biggest bond firms, dismiss the possibility of a default after the first government shutdown in 17 years as House Republicans failed to agree on a budget with Senate Democrats and President Barack Obama. With the closures shaving at least 0.1 percent off economic growth each week, Fed policy makers said they will probably keep buying $85 billion a month of bonds.

“The dysfunction in Washington just makes the Fed more likely to be supportive of the market,” Mark MacQueen, a partner and money manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $11 billion, said in a telephone interview Oct. 1. “We should stick to the underlying economic fundamentals and not worry about 72 hours in Washington. The real fear of a major rate increase is diminishing as long as this nonsense continues.”

Reduced Risk

MacQueen is buying corporate bonds and mortgage securities because they are worth the risk as alternatives to Treasuries, which make up about 25 percent of his holdings. Investment-grade U.S. corporate bonds offer about 146 basis points, or 1.46 percentage points, of extra yield compared with government debt, according to Bloomberg indexes.

Investors are showing confidence in Treasuries by pushing down two main risk measures. Three-month volatility on five-year interest rate swaps has decreased about 35 percent since last month. The gauge, a measure of projected yield fluctuations over the next 90 days, dropped to 79 basis points Oct. 4, from 123 basis points reached Sept. 5.

The MOVE Index, which uses options prices to project price swings in Treasuries across a range of maturities, declined 31 percent to 80 on Oct. 3, from 114 on Sept. 5. The 2013 average is 72.

Falling Yields

Treasuries were little changed last week, with 10-year yields rising 2 basis points, or 0.02 percentage point, to 2.65 percent, according to Bloomberg Bond Trader prices.