With economic data unavailable to guide interest rate expectations, US Treasury traders are turning to betting markets for signals on how long the government shutdown will last.
The government shutdown entered its sixth day on Monday, and unlike previous shutdowns, Trump's threat to fire federal employees has complicated negotiations. Strategists at firms including Goldman Sachs and HSBC noted in client reports that betting markets show a high probability of the shutdown lasting more than 10 days.
"Investors are concerned this shutdown could persist for an extended period," BMO Capital Markets strategists Ian Lyngen and Vail Hartman wrote in a report. "Whether it lasts one to two weeks or four to five weeks remains unclear. We expect the news cycle to focus on incremental progress in government reopening negotiations, which will intermittently fuel expectations for a restart."
US Treasury yields across all maturities rose Monday, following gains in most European and Asian sovereign bond yields amid heightened fiscal concerns. Bitcoin, gold, and silver prices climbed as investors viewed these assets as safe havens, moving away from US Treasuries, which typically benefit from safe-haven flows during government shutdowns.
Despite the data blackout, swap contracts tied to Federal Reserve policy meeting decisions show traders still see an 88% probability of a Fed rate cut this month.
On Monday, betting data from online platform Polymarket showed markets pricing a 66% probability of the shutdown lasting 10-29 days, a 29% chance of lasting more than 30 days, and only a 5% probability of ending before Thursday (lasting less than 10 days). The longest government shutdown to date occurred in late 2018, lasting 34 days.
The Congressional Budget Office estimates approximately 750,000 employees will be forced into unpaid leave, resulting in about $400 million in daily payroll reductions.
JPMorgan Chief Economist Michael Feroli and colleagues noted in a report that "the administration's threat to fire furloughed employees could create a larger consumption drag than usual."
US Treasury yields posted their largest weekly decline in a month last week as the government shutdown delayed release of closely watched employment data.
On Monday, yields on 10-year and longer-dated Treasuries rose more than 3 basis points, with the benchmark 10-year yield at approximately 4.15%. The global bond selloff was led by Japan, after fiscal stimulus advocate Sanae Takaichi unexpectedly won the Liberal Democratic Party leadership race and is set to become Japan's next prime minister. French government bond yields also surged after Prime Minister Sébastien Lecornu's resignation plunged the country into fresh political crisis.
Macro strategist Simon White said: "Term premium is driving global bond yields higher despite most central banks being in rate-cutting mode. Signs suggest markets believe the risk of fiscal deficits increasingly dominating monetary policy across multiple countries is rising."
Given that the shutdown is expected to delay more economic data releases this week, investors will closely watch speeches from Fed officials including Chairman Jerome Powell, as well as meeting minutes scheduled for release Wednesday.
"It's difficult to predict how long this situation will last," but the probabilities shown by Polymarket "highlight the depth of political divisions," HSBC strategists wrote in a report. "Very little US data will be released this week, though Wednesday's Federal Open Market Committee meeting minutes will be closely watched."