LIVE MARKETS-US funding battle may be key to Treasury market direction

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US FUNDING BATTLE MAY BE KEY TO TREASURY MARKET DIRECTION

A battle in Washington to continue to fund the federal government may have large consequences for the U.S. Treasury market, as it will set the tone for next year's budget and the direction of the bond yields, according to FHN Financial.

The U.S. is facing a potential partial government shutdown beginning next week as congressional Democrats and Republicans hit an impasse over details in a short-term funding bill, known as a continuing resolution (CR).

“The shutdown fight and CR are only the first battle in the bigger 2026 budget war. This CR would extend funding through November, during which time Congress hopes to pass the necessary appropriations bills to make up the budget. Nevertheless, the CR will set the tone,” Chris Low, chief economist at FHN said in a report.

“The budget fight is essential to the bond market,” Low said. “Wall Street is convinced Congress and the President will allow the budget to balloon again. If it does, long-term rates will rise. If Congress can keep the deficit from growing faster than GDP, long-term yields will likely drop. It really is that important.”

Analysts at BMO Capital Markets, meanwhile, note that if a government shutdown postpones key economic releases including jobs data it could make it even more likely that the Federal Reserve cuts rates again next month.

“Our sense is that embedded within the ~92% odds of a rate cut next month is the argument that a shutdown that leaves the Fed with an incomplete or distorted set of information on October 29th would make it increasingly difficult to justify not following-through with the quarter-point cut,” BMO analysts Vail Hartman and Ian Lyngen said in a note.

The U.S. central bank last week cut rates for the first time since December and Fed policymakers indicated they expected rate cuts to follow in October and December.

(Karen Brettell)

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