Treasury yields jump after Washington averts shutdown

What’s happening

• The yield on the 2-year Treasury
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  advanced 6 basis points to 5.106% from 5.046% on Friday. The 2-year rate was heading for Thursday’s closing level of 5.148%, the highest since July 2006. Yields move in the opposite direction to prices.

• The yield on the 10-year Treasury
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  rose 6.9 basis points to 4.641% from 4.572% on Friday. It’s on the way to its highest level since Oct. 16, 2007.

• The yield on the 30-year Treasury
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  gained 4.1 basis points to 4.750% from 4.709% on Friday. The 30-year rate is heading for its highest since February 2011.

What’s driving markets

Traders had gone into the weekend expecting a U.S. government shutdown that —by some analysts’ estimates — could have knocked 0.1 to 0.2 percentage points off of quarterly economic growth per week, and might have hindered the Federal Reserve’s ability to raise interest rates again in November.

But on Saturday night, the Senate voted to advance a short-term stopgap funding measure, averting a government closure for now. The development pushed the 2-, 10-, and 30-year Treasury yields back toward some of the highest levels in at least a dozen years.

Markets are pricing in a 30.9% probability that the Fed will hike interest rates by 25 basis points to a range of 5.5% to 5.75% on Nov. 1, and a 38.8% chance that will happen by December, according to the CME FedWatch Tool.

In U.S. economic updates released on Monday, S&P’s final manufacturing PMI for September came in at 49.8 versus a 48.9 initial reading, ISM’s manufacturing index rose to 49% last month from 47.6% in the prior month, and construction spending was up 0.5% in August.

Japan’s 10-year government bond yield
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was little changed at 0.776% after the Bank of Japan announced plans to buy additional amounts of 5- to 10-year debt to suppress yields.

What analysts are saying

Treasurys “were weaker overnight following the news that the federal government will not be shut down; at least not for now,” said BMO Capital Markets strategist Ian Lyngen and Ben Jeffery. “The stopgap bill keeps the government funded until Nov. 17. This bodes well for the prospects of a Nov. 1 Fed hike (presumably the last of the cycle) as monetary policy makers will have the full suite of economic data on which to base their decision.”

“Moreover, the odds of a rate increase next month were primarily weighed on by the notion that a government shutdown would leave the Fed flying blind via limited data as opposed to any interpretation of the prevailing trends in the U.S. economy,” they said in a note. “To be fair, the real economy is cooling, inflation is off the peaks, and the labor market is shifting back closer toward balanced. Whether that’s enough to keep the FOMC from following through on what’s widely expected to be the final rate hike of the cycle will be a function of Friday’s employment update and next week’s CPI print. All else being equal, if the market affords Powell the opportunity to hike by pricing it in, the Fed will deliver.”