Safe-haven bonds rise as government shutdown looms

U.S. Treasurys

U.S. Treasurys prices rose on Friday, driven by safe-haven demand on concerns about the implications of a possible U.S. government shutdown.

Washington braced for a partial shutdown on Tuesday as Congress struggled to pass an emergency spending bill that Republicans want to use to achieve Tea Party-backed goals, such as defunding the new healthcare reform law.

"The driver has been what's going on in Washington," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. "Equities have been trading pretty weak and there's definitely a safe-haven bid in the Treasury market."

Benchmark 10-year Treasury notes were up 7/32, with yields easing to 2.627 percent from 2.65 percent late on Thursday. notes rose 5/32 in price, driving their yields down to 1.40 percent from 1.44 percent late on Thursday.

Thirty-year bonds rose 6/32, their yields easing to 3.68 percent from 3.70 percent.

If the government shuts down non-essential operations on Tuesday, a number of key economic data, including the all-important monthly jobs report due on Friday, could be delayed.

In addition, unless Congress raises the debt ceiling by Oct. 17, the Treasury will only have $30 billion in cash on hand, leaving the United States on the edge of an unprecedented default, the Treasury said on Wednesday.

The cost to insure against a U.S. default rose on Friday to its highest level since May. Investors would have to pay about 32,000 euros to insure 10 million euros worth of Treasurys against a default in five years, up from 31,000 euros on Thursday and 22,000 euros a week ago, according to data from Markit.

Steve Van Order, fixed-income strategist with Calvert Investments in Bethesda, Maryland, said the wrangling in Washington could continue until stock investors get nervous and the stock market sells off sharply.

"That's usually the signal to politicians to scramble and do something," he said.

"We think the volatility risk is shifting more toward stocks now, and for buyers of corporate debt that could offer some opportunities if spreads widen out a bit," he said.

While a government shutdown is possible, analysts say ultimately a compromise will likely be reached to raise the debt ceiling, which is the more crucial issue.