The U.S. Treasury market remained largely steady on Thursday, but volatility indicators suggest turbulent days ahead as the country emerges from its longest-ever government shutdown. The yield on 10-year Treasury notes held firm at 4.08%, unchanged from monthly levels.
Money markets show significant divergence in expectations regarding whether the Federal Reserve will cut rates by 25 basis points next month, based on pricing of swaps tied to policy meeting dates. Notably, the ICE BofA MOVE Index, a key gauge of bond market volatility, has surged to a one-month high after hitting a four-year low—signaling that the impending flood of economic data from the government could trigger market swings.
Investors in this $30 trillion market have been awaiting the resumption of government economic reports for clues on the Fed’s final rate decision of the year. During the data blackout, private-sector figures like ADP’s employment report—which showed a cooling labor market—served as the only reference.
"Treasury investors are bracing for heightened volatility as the government resumes data releases," said Michiel Tukker, Senior European Rates Strategist at ING, in a client note. He added that with markets still uncertain about the Fed’s next move, any fresh inflation or jobs data could reshape the front end of the yield curve.
Complicating matters, White House Press Secretary Karine Jean-Pierre indicated Wednesday that October’s jobs report and Consumer Price Index (CPI) data may not be released on schedule. During the shutdown, Treasuries traded sideways, with the 10-year yield oscillating around 4%. The Bloomberg U.S. Treasury Index gained 0.4% over the period, extending its strongest annual performance since 2020.
However, traders aggressively positioned for 10-year yields to dip below 4% via options ahead of the data deluge, betting that the figures would confirm economic softening. "Only clearer signals on economic momentum and FOMC policy bias will break yields out of this tight range before December’s decision," wrote Ian Lyngen, Head of U.S. Rates Strategy at BMO Capital Markets. "The patchy private-sector data has particularly heightened our concerns about downside risks in the labor market."
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