Following a record 43-day shutdown, the President signed legislation to reopen the government last Wednesday.  Although the government has reopened, there is a sizable backlog of government economic data that was not available during the shutdown. The bond market is currently bracing for a flood of data as traders anxiously pare December rate cut expectations.  As of this morning, the Fed funds futures market was only pricing-in a 41% chance of a 25 basis-point cut in December.  Current rate expectations have declined significantly from last week, when the implied probability was in the 60’s.  The tone has turned decidedly more hawkish as several FOMC members have recently cited heightened inflation concerns, which prompted a sell-off in Treasuries last Thursday.

Not surprisingly, this irresolute sentiment has resulted in Treasury yields that remain little changed from when the shut-down began on October 1.  However, the municipal market has demonstrated more conviction with steady demand and appealing relative yields weighing on the long-end while shifting dynamics on the short-end have led to municipals selling-off.  As a result, we have seen the municipal yield curve flatten, resulting in declining slopes and less incentive to extend duration.

Today marks the 41st day of the longest government shutdown in US history, and it appears a resolution is potentially close at hand.  On Sunday, eight Senate Democrats joined Republicans in a push to advance a short-term funding measure that would extend government funding through January.  However, the legislation still requires a final vote by the Senate and needs to pass the House before the shutdown can end.  Following this news, the Treasury market has slid with 10-year Treasuries rising as much as 5 basis points to near 4.15% amid optimism .  Some caution is also warranted since the re-opening may potentially trigger volatility as a surge of delayed data releases.  This absence of government data has made policymakers more cautious about cutting rates, which will likely fade as data is released upon re-opening.  The Fed funds futures market is currently pricing-in a 65% chance of a 25 basis-point cut in December.  This is down significantly from just a few weeks ago when the implied probability was closer to 95%.

Today marks the 34th day of the US government shutdown, and despite the lack of government economic data and the continuous flow of headlines, there has been little response by the Treasury market.  Yields on Treasuries are little changed over the past month with the biggest changes on tenors under 6 months and the rest of the curve virtually unchanged.  Munis in tenors past 6-years have rallied as much as 20-basis points over the past month with the Bloomberg Municipal Index reporting a 1.24% return, which is the best October performance since 1995.  This performance was despite $55 billion of tax-exempt issuance.  Municipal tenors shorter than 6-years sold-off as demand shifted from the front end of the yield curve to the long-end as investors locked-in yields in anticipation of Fed rate cuts.  

The shutdown, which is now the third longest government shutdown in U.S. history, continues to populate headlines.  In addition, markets are operating without the usual government sourced economic data from the Bureau of Labor Statistics and the Bureau of Economic Analysis.  Absent this data, the markets have been looking to private sources and anecdotal data from businesses for guidance.  However, data from these sources is less than optimal and is typically not as broad or representative of the economy as government data sets.  Due to the weakening job market and a lack of updated government data to demonstrate otherwise, the markets are operating under the assumption the Fed will make another quarter of a point cut at its meeting next week.  Last week, Fed chair Jerome Powell indicated that economic concerns of the Fed had not changed during the data blackout.  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 and an additional 25bps cut in December.

Over the past week, Treasury and municipal markets have been largely unphased by the shutdown or the regional bank distress with yields experiencing minimal change on the long end of the yield curve.  Treasury yields rallied about 4.55 bps versus 5.5 bps for munis.  On the more policy sensitive short tenors under 2-years, yields differed with Treasuries selling-off a little over 5 bps and munis rallying around 3 bps.  Treasuries have lately been responding to haven buying, trade tensions and anxiety related to regional bank credit exposure.