Shutdown Leaves Fed Flying Blind as Yields Climb on Data Delays

The U.S. government shutdown entered its second week as Treasury yields continued to rise, reflecting heightened uncertainty over economic data and fiscal policy. The 10-year Treasury yield traded at 4.106%, while the 30-year yield stood at 4.713%, according to recent market dataU.S. Treasury yields: U.S. government shuts down - CNBC^[1]. The shutdown, triggered by a Republican-led Senate failure to pass a funding bill, has delayed critical economic reports, including the September nonfarm payrolls dataU.S. Treasury yields: U.S. government shuts down - CNBC^[1]. This delay has left investors and policymakers "flying blind," complicating assessments of labor market conditions and the Federal Reserve's next stepsTreasuries Gain on Week as Shutdown Leaves Market ‘Flying Blind’^[2]. The absence of timely data has amplified concerns about how the Fed will navigate its policy trajectory, with traders adjusting bets on rate cuts. While some expect two more reductions this year, others anticipate a pause in October, particularly if inflationary shocks-such as rising housing costs-emergeTreasuries Gain on Week as Shutdown Leaves Market ‘Flying Blind’^[2].

The prolonged shutdown has also raised fears about the creditworthiness of U.S. debt. Moody's downgraded the U.S. credit rating in May 2024, warning that further erosion of institutional strength could lead to additional downgradesU.S. Treasury yields: U.S. government shuts down - CNBC^[1]. JPMorgan analysts flagged a potential credit downgrade as a "tail risk" of the shutdown, noting that political gridlock could undermine confidence in Treasury securitiesU.S. Treasury yields: U.S. government shuts down - CNBC^[1]. This dynamic has already impacted bond markets, with yields rising as investors factor in heightened uncertainty. Stephen Miran, a Federal Reserve governor, highlighted that unexpected inflationary pressures, such as Trump-era tariffs, could force a reassessment of monetary policyTreasuries Gain on Week as Shutdown Leaves Market ‘Flying Blind’^[2].

Long-term Treasury yields have climbed despite the Fed's rate-cutting cycle, driven by multiple factors. Inflation expectations have risen to 2.40% as of January 2025, up from 2.03% in September 2024, reflecting concerns over persistent inflation from fiscal and policy measuresHow high could the 10-year U.S Treasury yield go? | T.^[3]. Real yields, measured through Treasury Inflation-Protected Securities (TIPS), have also increased, reaching 2.15%-well above the historical average of 1.33% since 1998How high could the 10-year U.S Treasury yield go? | T.^[3]. Additionally, term premiums, which compensate investors for interest rate risk, have trended upward, reaching 0.49% in late 2024 after hitting a low of -1.41% during the pandemicHow high could the 10-year U.S Treasury yield go? | T.^[3]. These factors, combined with ballooning budget deficits and political instability, suggest that Treasury yields could remain elevated.

The market's response to the shutdown has been mixed. While full government closures have historically had limited real economic impact, this instance is marked by strategic posturing from both parties. Analysts warn that permanent layoffs, as threatened by the Trump administration, could deepen the economic drag and further strain Treasury marketsU.S. Treasury yields: U.S. government shuts down - CNBC^[1]. The Federal Reserve's own inflation forecasts have shifted, with its long-term rate estimate rising to 3% by December 2024How high could the 10-year U.S Treasury yield go? | T.^[3]. This aligns with broader expectations that the Fed may maintain a cautious stance, with a 25-basis-point rate cut in October deemed insufficient to address emerging risksTreasuries Gain on Week as Shutdown Leaves Market ‘Flying Blind’^[2].

As the shutdown persists, the interplay between fiscal policy, inflation, and monetary strategy will remain central to market dynamics. The delayed release of key economic data has forced investors to rely on alternative indicators, while the Fed's policy outlook remains clouded. With credit ratings agencies on high alert and Treasury yields trending upward, the financial markets are bracing for a prolonged period of uncertainty.