TREASURIES-US yields fall on labor market concerns, government shutdown angst

(Adds investor comment, context, graphic; updates throughout) * Private employment decreased by 32,000 jobs in September * Government shutdown threatens federal jobs, data delays * Bets on October rate cut gain momentum * US sovereign CDS spreads tick higher By Davide Barbuscia NEW YORK, Oct 1 (Reuters) – U.S. Treasury yields fell on Wednesday as private jobs data signaled a weakening labor market and a U.S. government shutdown left investors second-guessing its impact on the economy. Private employment decreased by 32,000 jobs last month after a downwardly revised 3,000 decline in August, the ADP National Employment Report showed on Wednesday. Economists polled by Reuters had forecast a 50,000 increase following a previously reported 54,000 advance in August. U.S. data on Tuesday showed job openings rose moderately in August and subdued hiring. Investors focused on the ADP report to gauge labor market health especially because a U.S. government shutdown, which began at midnight on Tuesday after funding lapsed, means the Labor Department's closely followed September employment report will not be published on Friday. A report on weekly jobless benefits claims, scheduled for Thursday, will also not be published. This could challenge the Federal Reserve as it assesses whether to lower rates at its next policy-setting meeting at the end of October, after a 25 basis point cut last month. "This is another data point amid a laundry list of weak labor market data," said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments, referring to the ADP numbers. "It's a weakening labor market and the Fed is likely to continue on their cutting path through year end in our view. Not having other data points does make this harder for the Fed," he said. Institute for Supply Management (ISM) data on Wednesday showed U.S. manufacturing edged toward recovery in September, though new orders and employment were subdued as factories continued to grapple with the fallout from tariffs on imports. Rates futures traders were betting with more conviction on a 25 basis point rate cut in October following the jobs numbers, with bets on that cut rising to 99% on Wednesday from about 96% on Tuesday, CME Group data showed. NO PLAYBOOK The U.S. government shut down large parts of its operations on Wednesday after partisan deadlock blocked a funding deal, triggering a potentially prolonged standoff that threatens thousands of federal jobs. Shutdowns can spark market volatility, but history shows no consistent link to market performance. Economic consequences could be worse this time, however, as President Donald Trump, whose push to remake the federal government is already set to eliminate about 300,000 jobs by December, has warned Democrats that a shutdown could pave the way for 'irreversible' cuts to programs and further staffing. "If you look back at past shutdowns, there's not one single playbook on how this is going to play out," said Mike Griffin, co-head of corporate and municipal teams at Conning. "I think one of the big things is, is Trump going to move to do firings, converting furloughs into dismissals or does he not? And so that could obviously have a larger impact." Spreads on U.S. government credit default swaps, market-based gauges of the risk of a sovereign default, ticked higher on Wednesday. Ratings agency Fitch said the shutdown had no near-term implications for its rating of U.S. government debt, but it highlighted "long-standing policymaking weaknesses and political brinkmanship around budgetary issues." The benchmark 10-year Treasury yield was last down nearly five basis points on the day, at 4.106%, while two-year yields declined about six basis points to 3.545%. Two-year notes posted their biggest daily gain since early September. Yields move inversely to prices. The closely watched curve comparing two- and 10-year yields steepened to 56 basis points. Further steepening could occur next week when the government auctions three-year, 10-year and 30-year debt. A Treasury spokesperson has confirmed that auctions will be held as scheduled next week. The curve steepens when the yield premium of long-dated debt over shorter-dated debt widens, either because of expectations of rate cuts pushing short-term yields lower, or because of longer-term concerns such as demand-supply imbalances or inflationary fears that make long-dated bonds less attractive, or because of a combination of the two. (Reporting by Davide Barbuscia, additional reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski and Richard Chang)

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