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Government shutdown could delay key jobs report

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Fourth-quarter US economic growth could also be impacted

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October rate cut probabilities slightly higher

By Davide Barbuscia

NEW YORK, Sept 29 (Reuters) - U.S. Treasury yields

declined on Monday as investors increasingly accounted for the

risk of a U.S. government shutdown later this week that could

create economic uncertainty and delay the release of a critical

monthly jobs report on Friday.

President Donald Trump will convene a meeting with congressional

leaders at the White House on Monday in a last-ditch attempt to

end a political standoff ahead of midnight on Tuesday, when U.S.

government funding is due to expire.

If Congress fails to act, thousands of federal employees could

face furloughs, from NASA staff to national park rangers, while

a broad array of public services would be thrown into disarray.

Importantly for the bond market, the Labor Department's Bureau

of Labor Statistics could delay publication of a September jobs

report due on Friday that is key for investors to assess the

health of the economy and potential interest rate cuts by the

Federal Reserve.

Should that happen, investors and the Federal Reserve itself are

likely to give more weight to other labor market measures, such

as private payrolls data that will be published on Wednesday

with the ADP National Employment Report, to assess whether a

slowdown in the economy warrants an additional rate cut next

month.

"If there's a shutdown, there's not going to be a jobs report

... private employment releases will get more attention than

previously thought," said Stan Shipley, fixed-income strategist

at Evercore ISI in New York.

A shutdown could also have repercussions on economic growth,

depending on its duration.

Each week the government stays shut would shave about 0.15

percentage points off U.S. economic growth in the fourth

quarter, Goldman Sachs economists have estimated, assuming the

shutdown affects around 900,000 federal employees.

"If the shutdown lasts more than two weeks, then the economy

in the fourth quarter will probably be weighed down anywhere

from 0.3 to 0.5 percentage points," said Shipley at Evercore

ISI.

In early trade on Monday, rates futures traders were

assigning an 89.3% probability to a 25 basis point interest rate

cut by the Fed in October, slightly more than late last week.

The chance of a government shutdown stood at 73% on Monday

morning, according to online betting market Kalshi, lower than

about 81% late last week.

On the economic front, the calendar was light on Monday,

with the August reading of pending home sales up 4% month on

month and up 3.7% year on year, above estimates.

Investors were also monitoring speeches from Fed

policymakers to assess the likelihood of future rate cuts.

Federal Reserve Bank of Cleveland President Beth Hammack

said on Monday inflation risks outweigh those of nascent job

market fragility and indicated a need to keep interest rates up

to bring price pressures to heel. Other Fed officials are set to

speak later on Monday.

Benchmark 10-year Treasury yields were last at

4.145%, about four basis points lower on the day. Two-year

yields were last at 3.633%, down from 3.647% on

Friday.

The closely-watched yield curve comparing two- and 10-year

yields was flatter, at 51 basis points. A

flattening curve generally indicates some loss of confidence

over future economic growth.