Although the U.S. government shutdown last week, Treasury and municipal markets were largely undaunted with yields experiencing only minimal change.  However, the shutdown has resulted in the Bureau of Labor Statistics postponing its Employment Situation report, which is ordinarily delivered on the first Friday of the month, to report on employment levels and unemployment.  Despite the lack of data, Treasury yields only moved down by about 4 bps on the short-end and up by about 5 basis points on the long-end with the 5-year tenor essentially unchanged.  Muni yields moved in almost the opposite direction, with short yields climbing 2 basis points and long yields falling about 3.5 basis points and, like Treasuries, 5-year yields were essentially unchanged.  Furthermore, the Fed funds futures market is currently indicating an almost certain 94.6% chance of a 25bps rate cut at the Fed’s October 29 meeting.

With government funding set to expire Tuesday, the shadow of a potential government shutdown continues to loom over the bond market bringing yields down across the Treasury curve.  In addition, the shutdown threatens to delay the release of key economic data, including Friday’s nonfarm payroll employment data and unemployment rate from the Bureau of Labor Statistics.  This data is critical to current rate forecasts as weakening employment data was an influential factor in the Fed’s decision to cut rates earlier this month.  The Fed has recently commented that labor demand, and the recent pace of job creation, appear to be running below the “breakeven” rate needed to maintain current unemployment levels.  The Fed funds futures market is currently indicating an 88.7% chance of a 25bps rate cut at its October 29 meeting.

Attentions are focused on the Fed this week with their rate decision scheduled to be announced on Wednesday.  Traders are positioning ahead of Wednesday’s meeting with Fed funds futures continuing to demonstrate conviction of a 25 bps cut.  However, inflation has been creeping higher in recent months and is keeping the Fed cautious.  Last week, the Consumer Price Index for All Urban Consumers increased 0.4% on a seasonally adjusted basis for August after rising 0.2% in July.  The all-items index rose 2.9 percent for the 12-month period ending August, which is significantly above the Fed’s 2% inflation target.  However, many traders are arguing that weaker jobs data outweighs concerns of higher prices.  Last week the Bureau of Labor Statistics reported the U.S. labor market added 911,000 fewer jobs than previously reported, which many in the bond market are interpreting as additional justification for the Fed to cut rates later this week.

Over the past week, both municipal bonds and Treasuries have experienced a meaningful rally which shifted rates lower as sentiment intensifies in anticipation of a Fed rate cut.  Momentum picked-up as the week progressed, with 10-year Treasury yields charging through key support levels on Thursday and Friday.  Ultimately, the largest moves happened on Friday following the release of nonfarm payrolls by the Bureau of Labor Statistics which contributed to bumps in the municipal yield curve ranging from 2 bps in 2026 to 12 bps in 2055.  Prior to the data release, economists surveyed by Dow Jones were anticipating payrolls would rise by 75,000 jobs in August versus the actual survey report of only 22,000 jobs.  In addition to a disappointment versus the survey, this is a significant slowdown from July’s 79,000 job increase.  While the labor market is showing meaningful signs of cooling, unemployment remains at a historically healthy 4.3% and total non-farm payroll continues to set new monthly records.  This morning, the Fed funds futures market is pricing-in a 112% chance of a 25 bps cut at next week’s meeting.