Quick overview

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Bond traders are investing millions of dollars in options bets, believing that 10-year Treasuries are set for a rally that will drive yields to five-month lows.

Traders increased their bullish positions on Tuesday, just before a US government shutdown that could harm the economy and potentially reinforce expectations that the Federal Reserve will cut interest rates again at the end of October.

This activity follows last week’s surge in bullish 10-year options trades, with one position valued at approximately $50 million betting on yields dropping to as low as 3.95% during that period. The yield would be near its lowest since the market turmoil caused by tariffs in April.

The US government shut down for the first time in nearly seven years after Congress missed a midnight funding deadline.

The White House budget office shut down the government except for essential functions and instructed agencies to begin implementing plans for a funding lapse. According to Citigroup Inc., long-term Treasuries tend to benefit from extended shutdowns. Strategists note that in 2018, 10-year yields fell by almost half a percentage point during a shutdown that lasted over a month. The rally started beforehand amid growing fears that a shutdown could trigger a recession

10-year Treasury yields barely moved, staying around 15 percent. President Donald Trump heightened the risk this time by threatening to fire “a lot” of federal employees if a shutdown occurs on Tuesday. Key economic data, including the highly anticipated monthly employment report due Friday, could also be delayed.