US funding battles may be the key to the treasury market direction

The battle in Washington to continue to fund the federal government may have great consequences for the US finance department market, because it will set tones for the budget next year and the direction of bonds, according to FHN Financial.

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“Shutdown and CR battles are only the first battle in a larger 2026 budget war. This CR will extend funds until November, where the Congress time hopes to pass the allocation bills needed to form a budget. However, CR will determine the tone,” said Chris Low, Chief of Economist at FHN in a report.

“The budget battle is very important for the bond market,” Low said. “Wall Street believes the congress and the president will allow the budget for balloons again. If so, long-term tariffs will rise. If the congress can maintain a deficit from growing faster than GDP, long-term results are likely to go down. This is really important.”

Analysts at BMO Capital Markets, meanwhile, note that if the government is shutdown postponing the release of the main economy including work data, it can make it more likely that the federal reserve trimmed the tariff again next month.

“Our feeling is that it is embedded in ~ 92% of the opportunity for cutting rates next month is the argument that the shutdown that makes The Fed with a series of incomplete or distorted information on October 29 will make it more difficult to justify not following with quarter cutting,” said BMO Vail Hartman and Ian Lyngen in a tone.

The US central bank last week cut the tariff for the first time since December and Fed’s policy maker indicated that they expect a decline in interest rates to be followed in October and December.
Source: Reuters (Karen Brettell)