US yields decline as government shutdown risk looms

By Davide Barbuscia

U.S. Treasury yields declined on Monday as investors increasingly accounted for the risk of a U.S. government shutdown later this week that could create economic uncertainty and delay the release of a critical monthly jobs report on Friday.

President Donald Trump will convene a meeting with congressional leaders at the White House on Monday in a last-ditch attempt to end a political standoff ahead of midnight on Tuesday, when U.S. government funding is due to expire.

If Congress fails to act, thousands of federal employees could face furloughs, from NASA staff to national park rangers, while a broad array of public services would be thrown into disarray. Importantly for the bond market, the Labor Department's Bureau of Labor Statistics could delay publication of a September jobs report due on Friday that is key for investors to assess the health of the economy and potential interest rate cuts by the Federal Reserve.

Should that happen, investors and the Federal Reserve itself are likely to give more weight to other labor market measures, such as private payrolls data that will be published on Wednesday with the ADP National Employment Report, to assess whether a slowdown in the economy warrants an additional rate cut next month.

"If there's a shutdown, there's not going to be a jobs report ... private employment releases will get more attention than previously thought," said Stan Shipley, fixed-income strategist at Evercore ISI in New York.

A shutdown could also have repercussions on economic growth, depending on its duration.

Each week the government stays shut would shave about 0.15 percentage points off U.S. economic growth in the fourth quarter, Goldman Sachs economists have estimated, assuming the shutdown affects around 900,000 federal employees.

"If the shutdown lasts more than two weeks, then the economy in the fourth quarter will probably be weighed down anywhere from 0.3 to 0.5 percentage points," said Shipley at Evercore ISI.

In early trade on Monday, rates futures traders were assigning an 89.3% probability to a 25 basis point interest rate cut by the Fed in October, slightly more than late last week. The chance of a government shutdown stood at 73% on Monday morning, according to online betting market Kalshi, lower than about 81% late last week.

On the economic front, the calendar was light on Monday, with the August reading of pending home sales up 4% month on month and up 3.7% year on year, above estimates.

Investors were also monitoring speeches from Fed policymakers to assess the likelihood of future rate cuts.

Federal Reserve Bank of Cleveland President Beth Hammack said on Monday inflation risks outweigh those of nascent job market fragility and indicated a need to keep interest rates up to bring price pressures to heel. Other Fed officials are set to speak later on Monday.

Benchmark 10-year Treasury yields US10Y were last at 4.145%, about four basis points lower on the day. Two-year yields (US2YT=RR) were last at 3.633%, down from 3.647% on Friday.

The closely-watched yield curve comparing two- and 10-year yields (US2US10=TWEB) was flatter, at 51 basis points. A flattening curve generally indicates some loss of confidence over future economic growth.