WASHINGTON, Sept 25 (Reuters) - The risk of a partial

U.S. government shutdown beginning next week is rising as

congressional Democrats and Republicans hit an impasse over how

to continue to fund the federal government.

A shutdown could affect financial markets by limiting the

operations of financial regulators and delaying the publication

of key economic data.

How might markets react?

Historically, markets have tended to shrug off shutdowns.

However, this time could be different.

A prolonged shutdown risks delaying or canceling key economic

data releases investors use to assess macroeconomic trends, such

as the monthly employment and inflation reports, analysts at

Nomura said in a note this week.

That would mean the Federal Reserve is "flying blind",

making it more likely to stick with its own economic projections

of two 25-basis-point rate cuts for the rest of 2025, the

analysts said.

With investors unable to assess the extent of a U.S.

economic slowdown, the Treasury yield curve could steepen

further as rate cuts get priced in with more conviction, leading

to a wider gap between short- and long-dated Treasury yields, TD

Securities said in a note.

A lengthy government shutdown could also affect some market

participants' ability to conduct complex trades for which they

may require regulatory guidance.

What happens to financial regulators?

While U.S. President Donald Trump's administration had not

widely shared its contingency plans as of Tuesday, a shutdown

would likely reduce the U.S. Securities and Exchange Commission

(SEC) to a skeletal staff, according to its October 2024 plan

for a lapse in government funding.

This would severely limit the agency's ability to review

corporate filings, investigate misconduct, and oversee markets.

Likewise, the Commodity Futures Trading Commission would

furlough almost all of its employees and cease most market

oversight activity, according to its 2023 contingency plan.

Previous government shutdowns have caused delays in the CFTC

publishing reports on traders' positions in futures and options

markets.

The banking regulators and consumer watchdog, which are not

funded by congressional appropriations, will remain functional.

In 2019, a protracted government shutdown slowed down some

of Trump's de-regulatory efforts in part because of staff

furloughs at the Office of the Federal Register, which must

formally publish all steps in the rule-writing process, Reuters

reported at the time.

Will IPOs be affected?

Yes. A shutdown would likely freeze the IPO pipeline. Companies

planning to go public would be unable to proceed without the

SEC's approval, potentially dampening momentum in the equity

capital markets, which have enjoyed an IPO boom in recent

months.

(Compiled by Michelle Price

Editing by Marguerita Choy

)