To judge by recent history, a US government shutdown won’t be a huge event for the bond market. If anything, it could even provide a little short-term relief, since Treasuries usually rally when investors need somewhere to hide.
Less than four months after resolving a standoff over the debt limit that threatened to push the US into default, the dysfunction in Washington is taking center stage on Wall Street again. And that’s complicating the lives of analysts and investors already trying to gauge the Federal Reserve’s interest-rate path as the US economy defies gloomy forecasts, inflation remains stubbornly elevated and growth sputters elsewhere around the world.
Yet that doesn’t mean it won’t be consequential. A shutdown could muddy the outlook if it delays the release of key data reports — like the monthly employment and inflation figures due in the first half of October — or if it slows the economy as government workers go unpaid. It would also underscore the political unpredictability that’s already driven Fitch Ratings and S&P Global Ratings to strip the US of their top grades.
This time around, that could take some of the short-term pressure off the market. Yields have risen since the Fed last week indicated that rates are likely to remain high well into next year as the economy exhibits surprising strength. The selloff continued Monday, when 30-year yields rose as much as 15 basis points to 4.67%, the highest since 2011.
Gennadiy Goldberg and Molly McGown of TD Securities said in a note to clients that they expect a shutdown to buoy Treasuries, particularly shorter-term ones, by sapping risk-taking sentiment. “Overall, we view the shutdown as one of the many headwinds the economy faces this fall,” they wrote.
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