U.S. Treasury Yields Slide as Shutdown Concerns and Weak Jobs Data Weigh on Markets

U.S. Treasury yields declined sharply on October 1st in the New York bond market, reflecting growing investor unease as weak labor market data and the onset of a federal government shutdown drove demand for safe-haven assets. The yield on the benchmark 10-year Treasury fell by 5 basis points to settle at 4.10%, while the 2-year Treasury yield dropped 6 basis points to 3.545%. Consequently, the yield spread between the 2-year and 10-year Treasuries widened to 56 basis points, marking one of the steepest yield curves in recent trading sessions.

Economic Instability Fueled by Weak Jobs Data and Shutdown Fears

The latest labor market data from the ADP National Employment Report painted a bleak picture of U.S. private-sector employment, with jobs declining by 32,000 in September, a significant shortfall from expectations of a 50,000-job increase. This deterioration comes on the heels of a 3,000-job loss in August, reinforcing the narrative of a faltering labor market.

Adding to the turmoil, the federal government shutdown is expected to disrupt the release of critical economic indicators, such as the September jobs report and weekly initial jobless claims. These delays amplify uncertainty around the Federal Reserve’s upcoming policy decisions. Market consensus, as tracked by CME FedWatch, now assigns a near-certain 99% probability to a 25 basis point rate cut during the Fed’s late-October meeting.

Commenting on the implications of the labor market data, Matthew Miskin, Co-Chief Investment Strategist at Manulife John Hancock Investments, stated, “The significant drop in private-sector employment aligns with broader indicators of labor market weakness. This strengthens the likelihood of the Fed pursuing additional rate cuts through year-end. However, the absence of key economic data due to the shutdown complicates the Fed’s decision-making process.”

Credit Default Swaps (CDS) Reflect Rising Market Anxiety

The risk of a prolonged government shutdown has also reverberated into the credit markets, where credit default swaps (CDS) on U.S. Treasuries have widened. This signals heightened concern among investors over growing political and fiscal unpredictability. Fitch Ratings weighed in on the issue, noting that while the current shutdown does not pose an immediate threat to the U.S. credit rating, the deepening policy uncertainty and entrenched political gridlock present broader, long-term risks.

Mike Griffin, Co-Head of Fixed Income and Municipals at Conning, cautioned, “Historically, the economic ramifications of government shutdowns have varied. This time, however, the stakes may be higher if the Trump administration transitions temporary furloughs into permanent layoffs. Such a scenario could deliver a significant economic shock.”

Broader Market Implications: Navigating an Uncertain Landscape

The combined impact of strained labor market conditions, an unresolved government shutdown, and looming Federal Reserve decisions has left markets grappling with heightened uncertainty. Investors are bracing for potential ripple effects that could reshape both fiscal policy and broader economic stability. While the government’s political stalemate draws scrutiny, renewed signals of economic fragility further complicate the Fed’s monetary policy trajectory. This precarious environment underscores the need for vigilance, as both short-term market volatility and long-term risks remain intricately intertwined.