Under Government Shutdown Threat, Treasuries Demand Clarity While Stocks Can Thrive on Ambiguity

TradingKey - The risk of a U.S. government shutdown remains elevated, but market reactions in equities and bonds may diverge sharply under the uncertainty.

As of September 29, the shutdown crisis has reached a climax. President Donald Trump, who previously appeared indifferent to a potential shutdown, held an emergency meeting with the four top congressional leaders — a sign of growing urgency. 

Before their final negotiations conclude and a Senate vote is held, investors still face the risk that key economic data could be delayed — potentially reshaping market direction.

As TradingKey previously noted, U.S. stocks may benefit regardless of whether reports like the September Nonfarm Payrolls or CPI are delayed. Why?

• Weak private-sector employment data (ADP, jobless claims) could reinforce Fed dovishness
• Broader market sentiment remains resilient and optimistic
• Investors may interpret data delays as buying opportunities if they imply slower growth and more rate cuts

In this environment, ambiguity can support equity gains — especially with the S&P 500 trying to break the long-standing “September Effect.”

For bond investors, however, the calculus is different. Unlike stocks, the Treasury market isn’t operating under a “no news = good news” logic. Instead, it’s in a “Yes or No” mode: either clear evidence of economic weakness justifies lower yields — or it doesn’t.

Currently, the bond market demands concrete signals of sustained economic deterioration to push yields down meaningfully. But mixed messages from policymakers and data have created hesitation.

Last week, several Fed officials — including Beth Hammack (Cleveland), Alberto Musalem (St. Louis), and Raphael Bostic (Atlanta) — warned that inflation remains above target and urged caution on further easing. Chair Jerome Powell reiterated there is “no risk-free path” for policy.

Meanwhile, stronger-than-expected data — including Q2 GDP growth and lower initial jobless claims — led traders to scale back expectations for a October rate cut.

The 10-year Treasury yield briefly fell below 4% after the Fed’s September 17 rate cut — its lowest level in five months — but has since rebounded to around 4.2%. As of writing, it stands at 4.161%.

U.S. 10-Year Treasury Yield, Source: Investing.com

A High Bar for Rate Cuts — And Lower Yields

James Athey, Portfolio Manager at Marlborough Investment Management, described  the jobs report as what “you need to drive a rally from here — it’s the most crucial part of the weak-economy, dovish-Fed story.”

He added that even if the data is released, we’ll need a clearly weak print to drive yields down — and that’s a high bar. Athey has already reduced his U.S. Treasury exposure.

According to CME FedWatch Tool, current probabilities are:

• 89% chance of a rate cut in October
• 66% chance of another cut in December

While the Fed’s September Summary of Economic Projections points to two more 25-bp cuts this year (50 bps total), deep divisions remain among policymakers. For example, Stephen Miran, the Trump-backed governor, has publicly called for 125 bps of additional cuts — far beyond consensus.

Expectations for Treasury yields are clearly split: in options markets, buyers are betting the 10-year yield will fall back to 4% or below by late November; at the same time, JPMorgan client surveys show a sharp rise in bearish Treasury positions.

Vanguard argues the current ~4.16% yield is fairly priced, reflecting a balance between downside risks from a fragile labor market and upside pressures from resilient growth and sticky inflation.