U.S. 10-Year Yields Near 7-Week Low as Shutdown Looms

Treasury 10-year note yields fell, trading at almost a seven-week low, as Congress headed into the final hours before a midnight deadline for a partial government shutdown with neither side budging.

The benchmark yields pared their decline amid speculation a shutdown of may be short-lived, and after reports showed manufacturing gained more than forecast in three U.S. regions. The yields dropped earlier as more than 800,000 federal employees faced furloughs, spurring investor demand for safety. Lawmakers still must tackle the nation’s debt ceiling, the next fiscal dispute.

“The market popped overnight on the fear trade,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Most of the pop was on the headlines over the weekend that a shutdown was imminent. We’ve seen this story before. Who knows what noise is going to come out of Washington? Maybe the market is getting tired of pushing higher.”

Treasury 10-year note yields fell two basis points, or 0.02 percentage point, to 2.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They dropped earlier to 2.59 percent, the lowest since Aug. 12, before rising to as high as 2.64 percent. The price of the 2.5 percent security maturing in August 2023 increased 1/8, or $1.25 per $1,000 face amount, to 99 1/32.

‘Won’t Last’

“There is the assumption that if there’s a government shutdown, it won’t last for too long,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. While “the market has priced in what’s going on,” a prolonged shutdown “might prompt more concern and bring in the flight-to-quality bid.”

The Bloomberg U.S. Treasury Bond Index (BUSY) was little changed this quarter through Sept. 27. It has gained 0.9 percent this month and is down 2.4 percent in 2013. The Bloomberg Global Developed Sovereign Bond (BGSV) Index has gained 1.8 percent this month while losing 3.4 percent in 2013.

Rates on bills that mature Oct. 24 traded at 0.020 percent today after touching negative 0.010 on Sept. 27. Two years ago, one-month bills jumped to 0.18 percent on July 29, 2011, the highest since February 2009, as Congress pushed to the Aug. 2, 2011, deadline set by Treasury to avoid a default.

Three-month (USGG3M) Treasury bill rates traded at 0.0051 percent today. They touched negative 0.0101 percent Sept. 27, the lowest level this year. The 2013 average is 0.048 percent.

Health Law

The Senate rejected the House’s budget-extension plan, which passed on a nearly party-line vote early yesterday. House Republicans planned another volley that Senate Majority Leader Harry Reid has already rejected. They said they’ll again ask for changes to the nation’s 2010 health-care law, President Barack Obama’s signature legislative achievement. Republicans insist the bill include limits on the law, a demand Democrats say they won’t accept.

“The shutdown is expected to have a dampening effect on the economy,” driving yields lower, David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors, said. The economy “is fragile enough that the Fed is still pumping in $85 billion a month.”

The Fed surprised investors on Sept. 18 by refraining from reducing the amount of its monthly Treasury and mortgage bond purchases under the quantitative-easing stimulus strategy.

Debt Ceiling

A brief government shutdown won’t lead to any significant change of the Treasury’s forecast for when the U.S. will breach the federal-debt limit, a spokeswoman for the department said yesterday in an e-mail. The Treasury has said measures to avoid exceeding the debt ceiling will be exhausted on Oct. 17.

The U.S. won’t have enough money to pay all of its bills at some point between Oct. 22 and Oct. 31 without action by Congress, according to the Congressional Budget Office.

Ten-year yields increased from the day’s low after reports showed manufacturing increased in Chicago, Dallas and Milwaukee.

“The data was stronger than expected,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald, one of 21 primary dealers that trade directly with the Fed.

The MNI Chicago Report (CHPMINDX) business barometer rose to 55.7 in September from 53 the prior month. Numbers greater than 50 signal expansion. Economists surveyed by Bloomberg forecast 54.

The Dallas Fed (DFEDGBA)’s manufacturing gauge jumped to 12.8, versus a Bloomberg poll’s projection of 5.5 and a reading in August of 5. The Institute for Supply Management’s Milwaukee index rose to 55, versus a forecast of 50 and an August reading of 48.2.

Benchmark 10-year yields are forecast to rise to 2.85 percent by year-end, according to the weighted average estimate of 74 economists and strategists surveyed by Bloomberg.

Jobs Report

Employers in the U.S. added more jobs in September than the previous month and the jobless rate held at the lowest level since 2008, economists said before data due Oct. 4. Payrolls rose by 181,000 workers, the most since April, after a 169,000-job gain the prior month, according to the median forecast of economists surveyed by Bloomberg News. The jobless rate was 7.3 percent, economists estimated.

The Labor Department won’t release the employment report if the government is closed on Oct. 4, according to an Obama administration official who wasn’t authorized to discuss the process and requested anonymity. The official couldn’t say how the report might be affected if the government is shut down and re-opens before the end of the week.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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