The Treasury Yields Jump as Washington Averts a Shutdown

Bond yields increased on Monday following the resolution of a potential U.S. government standoff that had the potential to harm the economy. Here's what happened:

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• The yield on the 2-year Treasury rose by 5.4 basis points to reach 5.108%. It's worth noting that yields move in the opposite direction to bond prices.
• The yield on the 10-year Treasury also saw a rise of 4.6 basis points, reaching 4.625%.
• Similarly, the yield on the 30-year Treasury increased by 3.6 basis points, reaching 4.739%.

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Here's what drove these market movements:

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Traders had anticipated a government shutdown over the weekend, which some analysts estimated could have had a negative impact of 0.1 percentage points per week on U.S. GDP growth. Such an outcome might have reduced inflationary pressures and made it less likely for the Federal Reserve to raise interest rates in the near future.

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However, a temporary budget agreement was reached, preventing a government shutdown for now. This news contributed to pushing benchmark 10-year treasury yields closer to recent 16-year highs.

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Currently, the market is pricing in a 71% probability that the Fed will keep interest rates steady within a range of 5.25% to 5.50% at its upcoming meeting on November 1, as per the CME FedWatch tool. There's a 38% likelihood of a 25 basis point rate hike to a range of 5.50% to 5.75% at the following meeting in December.

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The central bank is not expected to lower its Fed funds rate target back to around 5% until October 2024, according to 30-day Fed Funds futures.

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On the economic front, the day's updates include the release of the S&P final manufacturing PMI for September at 9:45 a.m. Eastern, followed by the September ISM manufacturing survey and August construction spending at 10 a.m.

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Several notable figures from the Federal Reserve are also expected to make comments at various events throughout the day.

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In Japan, the 10-year government bond yield saw a dip from session highs after the Bank of Japan intervened with an additional purchase of 5 to 10-year bonds to suppress yields. This comes as the benchmark Japanese bond yield has risen to its highest level since 2013, as inflation has consistently exceeded the central bank's 2% target.

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