US Treasury prices are positioned for a third consecutive quarterly advance, as the potential government shutdown threatens to dampen economic growth and strengthens investor appetite for US bonds.

Data shows that US Treasury yields declined broadly on Tuesday, with bonds delivering a 1.5% return this quarter to date. For the first three quarters of 2025, US Treasuries have generated returns exceeding 5%, potentially marking their best performance since 2020.

Federal government funding is set to expire at midnight on September 30th local time. If both parties fail to reach agreement on relevant appropriations legislation, certain government agencies will face a shutdown. Such a shutdown would disrupt government operations, delay the release of key economic data, and potentially drag down economic growth. Historically, long-term Treasury prices have risen ahead of previous government shutdowns.

The 10-year Treasury yield fell 1 basis point on Tuesday to 4.13%, following a 4 basis point decline in the previous session. The 2-year yield stood at 3.60%, near its lowest level in the past year.

Scott Buchta, head of fixed income strategy at Brean Capital, indicated that this week's moves reflect "modest rotation into quality assets." He noted: "With prolonged shutdowns potentially causing economic slowdown, more people are becoming optimistic about US Treasuries, and the yield curve is flattening."

US Treasuries have generally trended higher this year as markets anticipate Federal Reserve rate cuts. The Fed reduced rates to the 4%-4.25% range in September while expressing caution about future policy given inflation remains persistently above target levels.

Recent reports have shown weakness in the US labor market. Investors will focus on job openings data due later Tuesday and Friday's nonfarm payrolls report to gauge labor market conditions.

Interest rate swaps suggest approximately 80% probability of another 25 basis point Fed rate cut in October, with another potential 25 basis point reduction in December.