TREASURIES-US yields decline as government shutdown risk looms

By Davide Barbuscia and Karen Brettell

NEW YORK, Sept 29 (Reuters) - U.S. Treasury yields declined on Monday as investors adjusted for the risk of a U.S. government shutdown later this week that could create economic uncertainty and delay the release of a critical monthly jobs report on Friday.

President Donald Trump will convene a meeting with congressional leaders at the White House on Monday in a last-ditch attempt to end a political standoff ahead of midnight on Tuesday, when U.S. government funding is due to expire.

If Congress fails to act, thousands of federal employees could face furloughs, and Trump's administration has threatened to permanently remove workers from some federal agencies.

The U.S. Labor Department said on Monday its statistics agency would suspend economic data releases, including the closely watched employment report for September due out on Friday, in the event of a government shutdown.

A void of data would make it more difficult for the U.S. central bank to gauge the strength of the economy as traders bet that the Fed will cut rates two more times this year.

Should data releases be suspended, investors and the Fed are likely to give more weight to other labor market measures, such as the ADP National Employment Report on private payrolls to be published on Wednesday, to assess whether a slowdown in the economy warrants an additional rate cut next month.

"If there's a shutdown, there's not going to be a jobs report, ... private employment releases will get more attention than previously thought," said Stan Shipley, fixed-income strategist at Evercore ISI in New York.

A shutdown could also have repercussions on economic growth, depending on its duration.

Each week the government stays shut would shave about 0.15 percentage points off U.S. economic growth in the fourth quarter, Goldman Sachs economists have estimated, assuming the shutdown affects around 900,000 federal employees.

"If the shutdown lasts more than two weeks, then the economy in the fourth quarter will probably be weighed down anywhere from 0.3 to 0.5 percentage points," said Evercore ISI's Shipley.

Rates futures traders are assigning an 89.3% probability to a 25-basis-point rate cut by the Fed in October, slightly more than late last week, according to the CME Group's FedWatch Tool. The chance of a government shutdown was last at 70%, according to online betting market Kalshi, down from about 81% late last week.

On the economic front, the calendar was light on Monday, with the August reading of pending home sales up 4% month-on-month and up 3.7% year-on-year, above estimates.

Investors were also monitoring speeches from Fed policymakers to assess the likelihood of future rate cuts.

Cleveland Fed President Beth Hammack said on Monday that inflation risks outweigh those of nascent job market fragility and indicated a need to keep interest rates up to bring price pressures to heel.

New York Fed President John Williams said that emerging signs of weakness in the labor market drove his support for cutting rates at the September central bank meeting.

St. Louis Fed President Alberto Musalem said he was open to further interest rate cuts, but the Fed must be cautious and keep rates high enough to continue to lean against inflation.

Benchmark 10-year Treasury yields US10YT=RR were last down 4.6 basis points on the day at 4.141%. Two-year yields US2YT=RR fell 1.4 basis points to 3.633%.

The closely watched yield curve comparing two- and 10-year yields US2US10=TWEB was flatter, at 51 basis points. A flattening curve generally indicates some loss of confidence over future economic growth.