Treasuries dropped for the first time in three days on speculation a shutdown of the U.S. federal government may end soon enough for lawmakers to work on extending the debt limit, minimizing damage to the economy.
Benchmark 10-year yields climbed from almost the lowest level in seven weeks as the government began its first partial shutdown in 17 years after Congress failed to break a partisan deadlock by a midnight deadline. An extended stoppage may prevent the release of jobs data on Oct. 4 that is closely watched for clues to Federal Reserve policy. The central bank last month refrained from slowing its bond-purchase program has helped to keep borrowing costs from rising.
“It could be that everyone's just shrugging it off and thinking it will be resolved sooner rather than later,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “For me though, the major driver in the markets in tapering. What's going on in the U.S. means the Fed is going to be even more reticent than it already is about tapering. It's probably a decent buying opportunity.”
The U.S. 10-year yield climbed four basis points, or 0.05 percentage point, to 2.66 percent at 8:02 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note maturing in August 2023 fell 13/32, or $4.06 per $1,000 face amount, to 98 20/32. The yield dropped to 2.59 percent yesterday, the lowest since Aug. 12.
Congressional leaders have scheduled no further negotiations on spending legislation, raising concern among some lawmakers that the shutdown may have an impact on the more consequential fight over how to raise the U.S. debt limit to avoid a first-ever default after Oct. 17.
Congress may only take a day or two to pass a budget, according to Samsung Asset Management Co.
“Yields are too low,” said Kim Youngsung, who helps oversee the equivalent of $105 billion as head of fixed income in Seoul at Samsung Asset, South Korea's largest private bond investor. “I don't think it's the right time to invest. They're going to solve the government shutdown problem in a short period of time, maybe today or tomorrow.”
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate Index rose for a fourth day yesterday, increasing 2.8 percent to 80.16. That's the longest streak of gains since Sept. 5.
The uncertainty surrounding the effects of the government shut-down will likely increase risk premium in financial markets and cause investors and companies to delay activity, Rick Rieder, chief investment officer of fundamental fixed income at BlackRock Inc. (BLK) said yesterday on Bloomberg Television.
The markets will be “in this period of a haze,” Rieder said. “We don't even know if the payroll number is going to come out on Friday.”
The Labor Department won't release its monthly employment report on schedule if the government is closed, according to an official in President Barack Obama's administration who wasn't authorized to discuss the process and requested anonymity.
The shutdown may help to delay a reduction in the Fed's asset purchases, according to Citigroup Inc. Policy makers said on Sept. 18 they want more proof of an economic recovery before tapering their $85 billion-a-month program.
“The Fed has told us they're on hold for quite some time and we now are not going to get any economic readings for probably a couple of months that are accurate at least,” Michael Plavnik, head of the short-term interest-rate trading desk at Citigroup in London, said in an interview on Bloomberg Television's “On the Move” with Manus Cranny. “The Fed's not really going to have a chance to taper really until the first quarter of next year.”
Payrolls increased by 180,000 in September, the most since April, after climbing 169,000 in August, according to a Bloomberg survey. The jobless rate held at 7.3 percent, a separate survey showed.
The failure of lawmakers to prevent a government shutdown may lead investors to increase bets they will fail to reach an agreement on raising the $16.7 trillion debt ceiling, according to Goldman Sachs Group Inc.
“The bond market has not priced these concerns and that they will continue to build,” Francesco Garzarelli, co-head of macro and markets research in London, wrote in a note to clients. “We recommend positioning for a steepening of the U.S. Treasury curve between three- and 30-year maturities.”
The extra yield on 30-year bonds over three-year notes increased one basis point to 308 basis points. Goldman predicts the spread will expand to 340 basis points, which would be the widest since August 2011. Investors should exit the trade if it narrows to 290 basis points, Garzarelli wrote.
Economists say an industry report today will show U.S. manufacturing expanded at close to the fastest pace in two years. The Institute for Supply Management Inc.'s factory index was 55 in September, based on the survey, after the prior month's reading of 55.7, which was the strongest since June 2011.
Treasuries fell in Asian trading as a report showed confidence among Japanese manufacturers increased this month, eroding demand for the safety of fixed-income assets.
The quarterly Tankan (JNTSMFG) index for large manufacturers increased to 12 in September from 4 in June, the Bank of Japan said. A Chinese manufacturing index showed expansion for September, though it fell short of the level predicted by a Bloomberg News survey.