TOC
Shutdown Catalysts: The Political Calculus Very important week for the shutdown as air traffic controllers will receive zero pay tomorrow and t e looming military pay day on Oct 31. Flight delays are increasing across the nation, as Secretary of Transportation Sean Duffy said that many air traffic controllers received notice on Thursday and Friday. Relatively speaking, paying the troops is more important for the GOP. Two latest developments are: “a friend” donated 130 million to pay the troops, and the Wash Post previously estimated that The Pentagon spends around $7.5 billion every two weeks in paychecks to soldiers and reservists. What’s more interesting is that Treasury Secretary Scott Bessent said on TV Sunday morning seems to be suggesting that the military pay day is hopeful to be fine: “I think we’ll be able to pay them beginning in November. But by November 15 our troops and service members who are willing to risk their lives aren’t going to be able to get paid."
On the procedural side, Thune indicated that most likely the votes on “rifle shot" bills to pay military and air traffic controllers will happen on Thursday. GOP seems to be focusing on showing progress on those pay bills as the Democrats obviously are not open to negotiate with GOP senate leaders before Trump is back on Thursday night. The Democrats are also working on to force votes on rem oving Trump tariffs this week, so they are most likely not in any interest to budge which would send contradictory signals. All together, this should put this government shutdown across the 30-day mark.
Key Dates to Watch
- Nov 1 (The Squeeze): This date is critical for both sides.
- GOP Lever: The White House has warned that SNAP benefits are set to pause. The administration is unwilling to tap the emergency fund (which could cover ~75% of Nov benefits) as a strategy to pressure Democrats.
- Dem Lever: ACA open enrollment begins. Democrats believe a surge in premiums in GOP states will put counter-pressure on Republicans.
- Nov 4 (Election Read-Through): General elections in key swing states (Georgia and NJ) will be closely watched.
- Baseline: Democrat candidates are currently leading.
- If Dems underperform: A flip, or a win by less than the 10-point pre-shutdown polling margin, would suggest they have little to gain by continuing the shutdown.
- If GOP underperforms: Losing these seats is expected for the party in charge, but a loss by more than 15 points would generate internal concern.
Bottom Line: There is very little incentive for either party to reopen the government this week, and likely not before the Nov 4 elections. This shutdown is on track to be the longest on record.
My base case remains that the shutdown is likely to stop around Nov 10, and we are using the 30-day and 35-day marks as key signposts for market trading. Last week’s news has not changed this view. However, two wildcards must be considered:
1. Wildcard: Ends < 35 Days (Forced Resolution)
- This requires a massive escalation in disruption. The most likely catalyst is aggressive “sick calls” from ATCs, causing flight disruptions so severe or lives are potentially endangered, forcing both parties to act.
- A secondary (less likely) catalyst is the SNAP pause proving politically toxic, forcing the GOP (more so than Dems) to negotiate. (Note: Some sources suggest the WH is quietly looking for ways to solve the SNAP situation, but I view this as unlikely to be a deal-breaker, though it may introduce volatility).
2. Wildcard: Ends > Nov 10 (Dysfunctional Extension)
- This scenario occurs if the Senate passes “rifle shot” bills to fund ATCs and troops. This does no good for a final resolution and unnecessarily prolongs the shutdown by easing the most acute political pressure.
- This path also risks internal GOP friction, putting Thune (Senate) at odds with Speaker Johnson (House) and the White House. Johnson has said he won’t bring the House back for the ATC bill, and the WH views these votes as a way to “bail out” Democrats.
Overall, the dynamics of the government shutdown will be a little bit more volatile this week, driven by the interplay between two factors: repeated pressure on Congress from federal employees working without pay, and Congress’s potential use of progress on targeted legislation as a temporary appeasement tool. However, the likelihood of the two congressional parties, who currently show no intent to negotiate, reaching a consensus this week in Trump’s absence before the key pressure points of November 1st and 4th is extremely low.
Market View & Tactical Positioning
Despite shutdown headlines, we see several headwinds for rates heading into this week.
- FOMC: While a comparable move in December is 100% priced into STIR futures, we assume the Fed will attempt to retain flexibility pending three month worth of data between now and the December meeting.
- Trade Talks: Positive progress on trade talks from Trump’s Asia trip have started to prompt profit-taking on the significant “risk-off” trade seen over the past months.
- Positioning: Trading more tactically going into this week and the next, I’m bracing for a near-term sideways shuffle in rates. We still expect another leg lower in rates could happen some time later this week or next driven by month-end demand and the eventual resumption of (likely weak) economic data.
- Action: Took profits on some duration longs and initiated shorts on the front end into this week’s events. Also short FFF6 (Jan ‘26 Fed Funds) as a more direct play on the December meeting.
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