- ZN1 contracts climb as traders price in a potential October Fed rate cut.
- The US government shutdown delays critical data releases, adding to market uncertainty.
- Futures signal cautious optimism, though inflation risks could still cap gains.
US interest futures extended gains on Friday, with the 10-year Treasury note contract for December (ZN1) holding near 113.00 territory. This reflects a yield equivalent of around 4.10%, a pullback from early September levels, highlighting a quick reaction of market participants on repricing the Fed’s policy path. The futures markets are pricing in risk when official data release is delayed, with looming political uncertainty.
The rally has been renewed by the weakness in the US labor market as the ADP employment change for September surprised to the downside with the loss of 32,000 jobs against the forecast of a 51,000 increase. The drop was the steepest since March 2023, followed by a downward revision to the August data. Investors interpreted this as a confirmation regarding Fed easing. The futures markets reacted accordingly, pushing the ZN contracts higher as traders sought duration exposure.
Adding to this, the continued US government shutdown, entering its third day, has halted the release of key economic data like NFP. Market participants have heavily turned to the proxy for economic signals, making Treasury markets unusually volatile with ZN1 contracts spiking as hedge funds rotated from equities to safe-haven bonds.
The expectation shift is reflected in the Fed funds pricing. According to the CME FedWatch tool, markets now price in a 97% probability of a rate cut in October, with another cut in December. Such projected terminal rate path and demand for Treasuries are lifting ZN1 prices.
Still, the risk is dual as a sudden resolution to the government shutdown could restore data releases and trigger profit-taking in long-duration contracts, dragging ZN lower. Meanwhile, a hawkish commentary from the Fed officials reiterating the risk of elevated inflation could unwind the Fed’s aggressive rate cut bets.
For now, the balance of evidence favors the bond bulls, with futures near 113.00 signaling the investors are prepared for an easing cycle. The 10-year contract remains the focal point for the markets, while volatility is likely to remain elevated into the next week.
