Now is not the time to turn into a bond vigilante, as betting against the U.S. government raising its debt ceiling could be "very dangerous," a top bond fund manager at BlackRock said.

The Treasury Department said the nation hit its $14.294 trillion debt limit Monday. It previously estimated it could stave off a default until Aug. 2 by drawing on other sources of money to pay its bills.

Only if there appears to be no hope of a debt-ceiling deal when August approaches would it make sense for markets to show signs of worry, said Rick Rieder, who oversees $595 billion of the firm's $1.15 trillion in fixed income assets.

"The view is that you will ultimately get resolution and for market vigilantes to come in, in front of that is I think very hard and very dangerous," he said in an interview with Reuters on Monday.

Investors who dump Treasurys on worries over budget deficits and inflation are often termed vigilantes.

In fact, Rieder said, there is actually a good case to be made for buying U.S. government debt, even though a recent rally has pushed the market to pricey levels.

Financial markets are likely to enter a phase of greater volatility when the Federal Reserve pulls the plug on its $600 billion bond-buying program next month. The sudden loss of support will place a premium on supposedly risk-free assets, which usually means U.S. Treasurys and similarly highly rated government bonds.

"I think there are a number of reasons why they will hold in better than people expect — out of volatility comes a bid for Treasurys," said Rieder.

YIELDS MAY DRIFT UP, BUT QE2 ROUT SEEN UNLIKELY

BlackRock's favorable view of the Treasury market is not necessarily shared by other big-name bond investors.

Pimco's Bill Gross and veteran investor Jim Rogers have been among the most vocal Treasury bears, warning that the end of the Fed's $600 billion bond-buying program next month could send yields soaring.

Gross told CNBC Monday his fund is "very underweight Treasurys" on concerns over the country's fiscal outlook.

BlackRock's Rieder, however, sees a large rise in yields as unlikely, noting demand for all fixed income assets from pension funds, banks and other investors is very strong relative to supply.

"There is a tremendous need for yield structurally around the world ... and that will put a lid on where interest rates are going to go," he said.
That said, a recent rally that has pushed benchmark 10-year note yields near their 5-month lows, makes rates now "less compelling," Rieder said.

The firm is currently "modestly" short duration — or underweight versus market benchmarks — in shorter-dated Treasurys, but neutral further out the curve.

It has also positioned many of its funds toward holding more liquid products on the expectation that the end of quantitative easing will increase volatility across all assets.

BlackRock sees yields likely to drift higher but would consider buying 10-year notes at yields of around 3.60 percent to 3.75 percent, Rieder said.

QE3 UNLIKELY, EFFECT ON UNEMPLOYMENT LIMITED

Rieder dismissed the likelihood of the Fed launching a third quantitative easing program as "very, very low." He said the effects of another program on reducing unemployment would be limited.

Further monetary stimulus could also weigh on growth as consumers have already been hurt by commodity price rises, although wage inflation has been largely stagnant.

"You've created a bifurcated economy, which I think is dangerous, and creates a dynamic that makes it very difficult on consumers and actually acts as a headwind on growth," Rieder said.

Instead, he said, fiscal policies aimed at enhancing corporate investment are needed to reduce unemployment.

"I think monetary policy today is very hard pressed to significantly improve growth, and employment," Rieder said.