The Democrat-led Senate is expected to pass the deal which raises the debt ceiling and cuts about $2.4 trillion from the deficit over the next decade.

Treasury yields rose only modestly, however, because investors fear the spending cuts may limit economic growth and they are watching to see if the deal goes far enough to avoid a credit rating downgrade.

"The US will stay in the news this week until the deal is passed," said Lyn Graham-Taylor, rate strategist at Rabobank.

"Potentially one of the agencies could still downgrade the US as the cuts they're talking about aren't enough to maintain the triple-A rating."

September Bund futures were 27 ticks lower at 130.09 with 10-year yields up 3.5 basis points at 2.57 percent.

"It might be a bit of risk-on day which could be beneficial for the periphery but bigger picture nothing's really changed and we still have to see what the rating agencies are going to say about the US," a trader said.

Technically, UBS analyst Richard Adcock said the market remained bullish while trading above 129.58 but a rise above Friday's 130.70 high would be needed to open the door towards the 132.00 level.

Equivalent Treasury yields were 5 basis points higher but held well below 3 percent with the slash in spending seen adding to headwinds facing an already weak economy.

The 10-year yield spread between Bunds and higher-yielding Treasuries was little changed from levels seen in after-hours trading on Friday at around 27 basis points.

Bunds also remained solidly underpinned by the euro zone's debt crisis where initial relief at policymakers agreeing a second rescue package for Greece quickly faded on doubts over how the plans would be implemented and whether contagion to Spain and Italy could be contained.

Spanish and Italian 10-year bond yields, which had risen close to euro-era highs, fell 7 and 8 basis points respectively, narrowing spreads over Bunds by around 11 basis points.

Spanish bonds could come under some pressure as it is the only euro zone country issuing long-term debt this week after Moody's put its credit rating on review for downgrade.

ING rate strategist Alessandro Giansanti said the 3- and 4-year auctions should benefit from recent coupon and redemption payments and be well bid by domestic investors.

With no supply next week, Spain and Italy may then see some further relief.

Copyright Reuters, 2011