US yields mostly lower in thin trading as shutdown halts key data

By Davide Barbuscia

U.S. Treasury yields were mostly lower on Thursday amid thin volumes and a dearth of economic data caused by the U.S. government shutdown.

The closure, the 15th since 1981, entered its second day with no sign of an imminent agreement between Republicans and Democrats to reopen government agencies.

A closely followed report on weekly jobless benefits claims was not published as scheduled on Thursday due to the shutdown. Data on August factory orders were also delayed.

This left the bond market directionless, with yields, which move inversely to prices, more susceptible to being moved by large trades. Yields were higher in early trading but then declined, though slightly, during the rest of the trading session.

"Volumes are thin ... so any sales or block trades will have had an outsized impact," said John Velis, Americas macro strategist at BNY.

With few economic data releases available, investors and policymakers at the Federal Reserve were parsing private surveys and alternative estimates to assess the health of the U.S. economy.

The shutdown itself could reduce economic growth by 0.1-0.2 percentage points for every week the government is closed, S&P Global Ratings Economics estimated.

"The Treasury market is feeding itself in the dark," said Michael Reynolds, vice president of investment strategy at Glenmede. He added he was casting a "really big net" to get a picture of the labor market, which he said appeared healthy but slowing.

A Chicago Fed estimate, published on Thursday, showed U.S. unemployment held at 4.3% in September. The release offered a temporary substitute for a key Labor Department monthly jobs report, due on Friday, which will be stalled by the shutdown.

Chicago Fed President Austan Goolsbee said policymakers will rely on such alternative data until official figures return.

A report from outplacement firm Challenger, Gray & Christmas released early on Thursday showed U.S. employers cut fewer jobs in September, but hiring plans remained at their lowest level since 2009. The release came a day after a disappointing ADP National Employment Report on Wednesday.

The Challenger data "continued to back up what labor data is available as being very weak," said Andrew Brenner, head of international fixed income at NatAlliance, in a note.

Benchmark 10-year Treasury yields US10Y were last at 4.09%, about one basis point lower on the day. Two-year yields (US2YT=RR), which had declined by six basis points on Wednesday, ended up slightly higher on Thursday, at 3.547%. The closely watched curve comparing two- and 10-year yields flattened to 54 basis points.

Rates futures traders were assigning a 98% probability to a 25 basis point interest rate cut by the Fed at its next policy-setting meeting at the end of this month, CME Group data showed.

Fed Dallas President Lorie Logan said on Thursday that while the Fed's decision to lower rates in September was appropriate to protect against a deterioration in the labor market, the central bank should be "very cautious" about future rate cuts due to stubborn inflation and potential price pressures from tariffs.