Bill rates drop on money market strain

*Treasury bill rates drop in safe-haven flight

*Paulson, Bernanke to testify again on $700 bln bailout

*Treasury to sell record $34 bln 2-year notes

NEW YORK, Sept 24 - U.S. Treasury bill rates fell on Wednesday with one-month rates slipping below zero, prompted by an unrelenting migration into cash and low-risk assets amid turbulence in money markets.

Worries about the passage through Congress of the government's proposed $700 billion bank bailout intensified safety bids for bills as well as longer-dated bonds, traders and analysts said.

"There's a tremendous amount of anxiety whether this (bailout) bill will get passed," said Thomas di Galoma, head of U.S. government bonds at Jefferies & Co. in New York.

On Tuesday, U.S. lawmakers held a hearing at which Treasury Secretary Henry Paulson, Federal Reserve Ben Bernanke and other top financial officials testified and urged swift Congressional passage of the bailout. Lawmakers, for their part, questioned the cost and lack of details in the plan,

Paulson and Bernanke will appear before Congress again on Wednesday.

Early fixed-income trading was most pronounced in the Treasury bill or T-bill sector, which investors like money market mutual funds have piled into in a bid to preserve capital and to ensure adequate money to meet redemptions, analysts said.

"There's still a lot of money trying to find a home on the front end," di Galoma said.

The thrust into T-bills sent one-month rates <US1MT=RR> a touch below zero percent overnight and three-month rates <US3MT=RR> below 0.50 percent.

The intense T-bill demand could crimp demand for longer-term Treasury paper, so the market will closely watch the Treasury's auction of a record $34 billion of two-year notes later Wednesday, analysts and traders said.

Woes in the credit markets and uncertainty about the bailout plan have overshadowed higher stock index futures, which were boosted by news of a $5 billion investment in Goldman Sachs <GS.N> by U.S. billionaire Warren Buffett, analysts said.

On the data front, the National Association of Realtors will release its August data on existing home sales at 10 a.m. (1400 GMT).

In other cash trading, the price on benchmark 10-year notes <US10YT=RR> was up 3/32 at 101-22/32. Their yield, which moves inversely to price, was 3.79 percent, down 1 basis point from late Tuesday.

Two-year notes <US2YT=RR> were flat to yield 2.09 percent.