US Treasuries Better; Market Eyes Shutdown, Tariff Impact

US Treasuries have clawed back from lows, though the yield curve steepened with the 10Y yield at ~4.31% and the long bond hitting 5.00%. The market is grappling with significant headwinds, including the looming September 30 government funding deadline and persistent tariff uncertainty, which ISM leadership suggests could outweigh any potential Fed rate cut benefits. Upcoming supply of approximately $119B across 3s, 10s, and 30s, coupled with Friday's crucial jobs report, will be key inputs for market direction and the Fed's September 17 meeting.

Analysis

US Treasuries are exhibiting a tentative recovery, but the fixed income market is navigating significant crosscurrents, reflected in a steepening yield curve where the 2/30-year spread has widened to +132 basis points from +128. Yields have moved notably higher, with the 10-year reaching approximately 4.31% and the long bond hitting 5.00%. Market sentiment is weighed down by two primary sources of uncertainty: the looming September 30 government funding deadline, which introduces fiscal instability risk, and the unresolved impact of tariffs. The head of ISM has explicitly cautioned that uncertainty surrounding tariff-related input costs could fully outweigh any stimulative effect from a potential Federal Reserve rate cut, highlighting a direct conflict between trade and monetary policy. Adding complexity is the dual nature of these tariffs, which have both raised costs and provided revenue to mitigate the deficit. Looking ahead, the market is positioned for two critical catalysts: Friday's jobs report, which is a key determinant for the Federal Reserve's September 17 meeting, and a substantial new supply of approximately $119 billion in 3-year, 10-year, and 30-year Treasuries scheduled for next week.

Key Decisions for Investors

• Investors should closely monitor political developments surrounding the September 30 government funding deadline, as a potential shutdown remains a primary source of near-term market risk.
• Given the steepening yield curve and the 30-year bond hitting 5.00%, portfolio managers should reassess duration risk and consider strategies that could benefit from a continued widening of the spread between short and long-term rates.
• Traders should remain nimble ahead of Friday's jobs report and next week's large Treasury auctions, as these events are poised to inject significant volatility by clarifying both the path of monetary policy and the market's appetite for new debt supply.