- US interest futures are repositioned as the federal government shutdown ends.
- Short-dated contracts surge while long-dated contracts stay cautious.
- Inflation and employment figures are important to watch as these data could reshape the market.
US interest futures experienced a decisive reset on Friday as market participants reassessed the Fed’s policy trajectory after the US government shutdown ended. The reduced uncertainty and potential visibility of key data have triggered a divergence between short-dated and long-dated contracts.
Short-dated interest futures, such as 2-year Treasury futures and Fed funds, jumped after the shutdown resolution. The move is expected to resume jobs with inflation and spending data releases, which could provide clarity for the Fed to justify further easing. Fed funds futures now indicate a skewed market, with weaker job markets, which could cement the probability of a December rate cut. Meanwhile, upside surprise could trigger a sharp unwind.
The data blackout during the shutdown period led investors to rely on private data sources, prompting them to hedge against downside risk and factor in the odds of aggressive rate cuts. The economic calendar is now set to become unusually influential. The delayed data could carry disproportionate weight as Fed officials would judge whether the economic softening was real or just a statistical mirage.
On the other hand, long-dated contracts like ZN1 and UB1trade with relative inertia. The underlying structural risks stay intact despite the shutdown ending. The Treasury faces one of the largest refinancing cycles in decades, which is pushing the fiscal deficit and long-term premium higher. These developments put a floor under the yields, softening long-end sensitivity to the shutdown outcomes. Analysts expect that if the Fed cuts rates in December, the long end of the yield curve will not mirror the move due to a cautious global investor base and supply-led pressures.
The backdrop of the US shutdown has reduced fourth-quarter economic growth by up to 2%, resulting in a permanent loss of more than $11 billion. This pushes the short-dated contracts up, leaving long-dated futures less optimistic. The yield curve could steepen as front-end rates fall, but back-end rates remain sticky.
The immediate focus lies on the inflation and employment data that could dominate the short-term contracts. However, long-dated contracts remain cautious, as structural risks are likely to govern the direction over the next 12 to 24 months.
