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US yields in consolidation mode

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White House economic adviser says shutdown could end this

week

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Bond market looks to US inflation data on Friday

(Adds new comment, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 20 (Reuters) - U.S. Treasuries were

moderately bid on Monday, with yields edging lower and trading

held within tight ranges amid improving risk sentiment as the

China trade outlook appeared less dire than it did weeks

earlier.

Investors remained broadly cautious, however, as the federal

government stayed shuttered for a 20th consecutive day, with no

real compromise expected from either Republicans or Democrats.

But White House economic adviser Kevin Hassett said on

Monday the shutdown could likely end this week. He said his

"friends in the Senate" believed it was "bad optics for

Democrats to open the government before the 'No Kings' rallies

and that now there's a shot that this week things will come

together."

In afternoon trading, the benchmark 10-year yield slipped

1.9 basis points (bps) to 3.989%, while 30-year bond

yields drifted lower by 2.3 bps to 4.579%.

On the shorter end of the curve, U.S. two-year yields, which

reflect interest rate expectations, were flat at 3.469%

.

"I don't see any reason that anybody is going to magically

end this lockdown and so the longer this goes on, the more

uncertain the market gets," said Byron Anderson, head of fixed

income, at Laffer Tengler Investments in Scottsdale, Arizona.

"But I think the bond market is pretty well behaved

right now and we really haven't seen panic in anything.

Eventually we're going to see problems from the lockdown, and I

think the Federal Reserve will continue to cut, and it's needed

at the margin."

The Fed is expected to cut two more times this year,

with 25-bp cut baked in for the October meeting, according to

LSEG calculations.

China sentiment, in the meantime, has also improved,

adding to the risk-on tone overall.

U.S. Treasury Secretary Scott Bessent said on Friday he

expects to meet this week with Chinese Vice Premier He Lifeng in

Malaysia to try to forestall an escalation of U.S. tariffs on

Chinese goods that President Donald Trump said was

unsustainable.

Trump also confirmed he would meet with Chinese President Xi

Jinping in two weeks in South Korea and expressed admiration for

the Chinese leader.

"There is better sentiment on China and trade that it's not

going to spiral into a nightmare," said Stan Shipley, managing

director and fixed income strategist at Evercore ISI.

Investors are also looking forward to the release of the

September Consumer Price Index report on Friday that should give

some perspective as to where inflation is headed.

"While the inflation data will contribute to the Fed's

messaging at its upcoming meeting, it won't change the outcome

of the rate decision," wrote BMO analysts in a research note.

"CPI won't deter a rate cut this month even if the core

measure prints at the top of the range of economist estimates,"

the bank said. The consensus forecast for core CPI last month

was 0.3%, unchanged from August, an estimate that reinforces

"the limited inflationary fallout from the trade war thus far,"

BMO said.

In other parts of the bond market, the yield curve bull

flattened on Monday, with the gap between U.S. two-year and

10-year yields at 52.4 bps, from 55 bps late

Friday.

A bull flattening curve refers to a scenario in which

long-term interest rates are falling faster than those on the

short end, which reflects either a flight to safety or a

lowering of inflation expectations. In any case, a bull

flattener often precedes an interest rate cut from the Fed.