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Treasuries Poised for Third Quarter of Gains as Shutdown Looms

(Bloomberg) -- Treasuries were set to close out a third straight quarter of gains Tuesday as a pending US government shutdown threatens to slow economic growth, boosting the case to buy bonds.

Yields broadly fell on Tuesday, capping off a quarter in which the market has posted a 1.5% return, according to a Bloomberg index. Treasuries have returned more than 5% through the first three quarters of 2025, setting them up for the best year since 2020.

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Officials face a midnight deadline to avoid a shutdown that would disrupt US government operations, delay the release of key economic data and potentially drag down economic growth, depending on how long it lasts. Ahead of previous episodes of prolonged stoppages, long-dated Treasuries have rallied.

The 10-year yield was trading one basis point lower at 4.13% on Tuesday, after closing four basis points lower the previous day. The two-year yield at 3.60% is near some of its lowest levels over the past year.

Scott Buchta, head of fixed-income strategy for Brean Capital, said the moves this week reflect a “small flight to quality trade.”

“The yield curve is flattening as more people are becoming constructive on the market amid the possibility that an extended shutdown slows the economy,” he said.

The market has rallied broadly this year on the expectation of interest-rate cuts by the Federal Reserve. Policymakers reduced the rate to a range of 4% to 4.25% at their September meeting, but signaled caution on the path forward as inflation remains persistently above the Fed’s target.

Investors have focused on the pace of hiring, with recent reports showing weakness in the labor market. Job openings data due later Tuesday will offer fresh evidence, ahead of non-farm payrolls on Friday — unless a shutdown delays that release date.

Interest-rate swaps tied to the dates of upcoming Fed meetings suggest a roughly 80% chance of another quarter-point cut in October, with a reduction of the same size likely in December.

--With assistance from Alice Gledhill.