• “If we have resolution by next Thursday we will get CPI and the employment report together, and that could lend itself to some jumpy price action if we get an outlier, and that outlier can cut both ways,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.

The world’s biggest bond market has been stuck in a rut, but traders are preparing for what could be a
whirlwind of action once the US government shutdown ends and unleashes a flood of key economic data.
Expected volatility in US Treasuries has cratered since the closure started last week, delaying the release of all-important official reports on employment and inflation at a pivotal time — in the lead-up to the Federal Reserve’s two remaining meetings this year. The next one is just weeks away, with a decision due Oct. 29.

It’s a recipe for turbulence in the $30 trillion market once the barrage of statistics resumes, with the added twist that the shutdown may complicate the collection of the figures. Options activity shows demand for hedges against a range of Fed scenarios before year-end. The main question is if the data will point to either hot inflation or a cooling job market posing the
bigger challenge as officials decide whether to ease again.

“The longer it goes, even if for another week, you have to question the quality of October’s economic data, and that makes
for a harder read of the health of the underlying economy both for the Fed and markets,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “So yes, things could get jumpy.”

For now, there’s a sense of calm in Treasuries. Yields have held in well-defined ranges as the data void keeps intact the consensus expectation that the Fed will follow last month’s quarter-point rate cut, its first this year, with two more moves of that size by year-end. After October, officials meet again in December.

The market’s outsize reaction this year to the monthly jobs and inflation reports hints at what awaits when the shutdown
ends. The releases have triggered some of the biggest bond-market reactions in recent months. On average, the two-year yields moved about 10 basis points over the past year on the days of payroll report releases, and about 5 basis points when the consumer price index came out. That compares with the daily average move of less than 4 basis points for all days over the past year, data compiled by Bloomberg show. The employment data, which was set for release on Oct. 3, has already been delayed. Now traders are looking to the consumer price index, due Oct. 15. The Fed pivoted last monthamid a weakening employment backdrop, but with inflation still above target some officials are urging caution around further rate cuts.

“If we have resolution by next Thursday we will get CPI and the employment report together, and that could lend itself to some jumpy price action if we get an outlier, and that outlier can cut both ways,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.

Options pricing last week showed traders were bracing for the impasse to last as many as 29 days, according to rates
strategists at Morgan Stanley. A lengthy standoff likely limits the government’s ability to fully collate data for the October jobs report that’s scheduled for early November. So the figures could be a trickier read, making it even harder for the bond market to figure out the implication for the Fed.

“The problem will be the October jobs report — especially if the government remains shut down through this week,” Liz Ann Sonders, chief investment strategist at Charles Schwab, told Bloomberg Television. “Then you have a big chunk of the reference period within the October jobs report that is less clean data by virtue of the shutdown.” Positioning in options linked to Fed decisions shows traders preparing for the outlier risk of just one more quarter- point cut this year. Another trade contemplates one quarter- point and one half-point move.

“The bond market right now is operating under the assumption there will be a cut in October,” said Kevin Flanagan, head of fixed-income strategy at WisdomTree. “We’re all in wait-and-see mode.”