Treasury Yields Climb on Optimism for End to US Shutdown

(Bloomberg) -- Treasuries slid as the prospect of an end to the longest US government shutdown in history prompted selling in haven assets.

Yields on benchmark 10-year debt rose as much as five basis points on Monday to near 4.15% after the Senate on Sunday evening voted 60-40 on a procedural step to advance a bill to end the shutdown.

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While the Senate has yet to schedule a final vote on the package and the House also still needs to approve it, global markets took the step as a breakthrough. Ending the shutdown would give investors access to economic data and greater clarity on the outlook for further interest-rate cuts from the Federal Reserve.

“Risk appetite improved on hopes of a US shutdown resolution,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho Bank Ltd, adding that this was pushing Treasury yields higher. “Now we have moderate Democrats in the Senate voting to move forward, it could be the end game with the government staying open until January.”

Treasuries were already under pressure late last week, when the Fed’s Vice Chair Philip Jefferson said the central bank should move cautiously on rates as they approach a neutral level, following October’s reduction. Traders are still betting on a nearly 60% possibility that the Fed will deliver another 25 basis-point cut next month.

An end to the shutdown could restore funding to federal agencies until the end of January, and some government departments until the end of the fiscal year. Investors are waiting for a backlog of data on inflation and jobs, which have been held up by the shutdown.

A re-opening of government services would allow markets to “re-focus on what remains a solid bull case of the underlying economy remaining robust, earnings growth proving resilient, the monetary backdrop continuing to loosen, and a calmer tone being taken on trade,” said Michael Brown, senior research strategist at Pepperstone.

The bond market will face fresh tests of demand this week, with auctions of new three-, 10-year notes and 30-year bonds — totaling $125 billion — beginning later in the day. While US markets will be closed on Tuesday for Veterans Day, a reading of small business optimism due then could provide some steer on the economy.

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Treasuries could come under more pressure if US fiscal concerns return to the fore after President Donald Trump suggested that Americans may receive a tariff “dividend” of at least $2,000.

“If this idea gains traction we may well see renewed selling in the UST bond market and a steepening of the yield curve as the long-end starts to fret about debt sustainability again,” said Derek Halpenny, a head of global markets research at MUFG.

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