On the Radar: Historic U.S. Government Shutdowns and Their Impact on Bond Yields (US & Canada)

  • First National Financial LP

Quick Takes:

  1. Frequent but Brief: Since 1976, the U.S. government has shut down 21 times, averaging about 8 days each. Most were short, limiting economic impact. The longest lasted 35 days in the 2018–19 period.
  2. Safe-Haven Effect on Yields: U.S. 5- and 10-year Treasury yields typically dip during shutdowns as investors seek safety. In the last three shutdowns, the 10-year yield averaged 0.05 percentage points lower.
  3. Canadian Yields Mirror U.S. Moves During Past Shutdowns: Canadian 5- and 10-year government bond yields closely track U.S. movements.

Government funding showdowns in Washington may appear to be theater, but they ripple through bond markets on both sides of the border. When the U.S. government shuts down, investors often shift toward government debt. This issue of On The Radar examines shutdowns since 1976 and how 5-year and 10-year yields in the U.S. and Canada behaved before, during, and after these events. History does not repeat exactly, but it offers clues to what the 2025 standoff may mean for North American interest rates.

Late 1970s and Early 1980s: First Shutdowns in a High-Rate Era

Context: The 1974 Budget Act introduced a new process, and by the late 1970s, funding gaps were common. Early gaps under Presidents Ford and Carter did not fully halt operations. That changed after a 1980 legal opinion. On May 1, 1980, the Federal Trade Commission closed for a day, the first agency shutdown due to a budget impasse. This established that agencies must stop work without appropriations.

Bond Market Before: With double-digit inflation and very high interest rates, investors focused on central bank policy, rather than short-term political disputes. In 1981, Canadian 10-year yields were about 16 to 17 percent, reflecting tight stances by the Fed and the Bank of Canada. Early funding gaps created little visible turbulence, and any effects were lost in a volatile backdrop.

During Shutdown: Initial shutdowns were brief or limited. In November 1981, a two-day lapse followed a veto fight. Bond markets stayed orderly. Around that time, Canadian 10-year yields fell from about 16.8 percent in October to 14.9 percent in November. U.S. Treasuries also rallied as spending restraint and slowing growth came into view. Tiny gaps in 1984 and 1986, each only hours, left no imprint on yields.

Aftermath: Once budgets passed, rates showed no lasting hangover. The early 1980s story was one of disinflation and a shift from extremely high rates to lower levels as the Fed eased. The 1981 shutdown ended with a stopgap deal, and yields continued to trend downward. The pattern was set: when resolved quickly, shutdowns saw yields hold or fall, then resume prior trends as the government reopened. Investors distinguished between shutdowns and defaults, often adding safe-haven demand for bonds rather than selling them.

1990: A Brief Shutdown amid Recession Fears

Context: The next notable funding gap came in October 1990 under President George H.W. Bush. This 3-day shutdown (Oct 6–8) occurred during deficit-reduction talks and coincided with the start of a mild recession. Bush’s agreement to tax hikes angered his party, delaying budget passage. Unlike many standoffs, this one overlapped with clear economic trouble, as the recession had begun in July 1990.

Bond Market Before: Yields had been rising in mid-1990. U.S. and Canadian 10-year yields climbed through the summer on inflation worries and late-cycle pressures. Canada’s 10-year yield rose from about 10.7% in July to over 11.1% by October, while U.S. Treasuries showed a similar uptick. Markets expected larger deficits and had not yet priced the slowdown.

During Shutdown: The lapse was short and caused little disruption. Yields peaked near the shutdown, then retreated as investors anticipated a budget deal and weaker growth. Canada’s 10-year yield dropped from about 11.2% in early October to 10.6% by November. U.S. yields also eased. A flight to quality pushed bonds higher, even as the Gulf War buildup added uncertainty.

Aftermath: By January 1991, 10-year yields had fallen below 9% as the recession took hold and the Fed cut rates. The bipartisan budget deal reduced near-term fiscal uncertainty, reinforcing the rally. Analysts later noted that the 1990 shutdown left no lasting mark on yields, which continued to fall in line with economic fundamentals. The episode showed that a brief closure during downturns tends to accelerate declines in yields as markets anticipate easier policy, rather than spark sell-offs.

1995–1996: Protracted Budget Battles and Bond Rallies

Context: The 1995–96 shutdowns were among the most consequential. A new Republican Congress clashed with President Clinton over balancing the budget, Medicare, and taxes. Two closures followed: 5 days in November 1995 and 21 days from December 16, 1995 to January 6, 1996. Agencies closed and hundreds of thousands were furloughed. Republicans also threatened to withhold a debt ceiling increase, which raised fears of default. It was the most serious standoff since 1980 and the longest until the 2010s.

Bond Market Before: After the 1994 bond selloff, inflation cooled and the Fed cut in July 1995. Yields were already drifting lower. The 10-year U.S. Treasury was about 7.8% in early 1995 and easing by November. Canada’s 10-year peaked near 9.1% in late 1994 and fell into the mid-7% range by fall 1995. Markets anticipated fiscal tightening and slower growth.

During Shutdown: Bond markets strengthened. The short November lapse brought little pressure on yields. During the 21 days from December to January, investors bought Treasuries. The U.S. 10-year fell to roughly 5.6% by late January 1996, from about 7% mid-1995. It ended 1995 at 5.65%, down from 7.88% at the start of the year. Canada’s 10-year dropped from about 7.7% in October to near 7.1% by January. The Fed had room to ease and cut again in January 1996. Treasury coupons were paid on time, and markets expected the debt ceiling to be raised.

Aftermath: The eventual budget deal set a path to balance later in the decade. Yields stayed lower. U.S. 10-year rates were in the 6% range by end-1996 and near 5% by 1998 as surpluses emerged. Canadian 10-year yields fell below 6% by 1997. Lesson: if a shutdown ushers in fiscal restraint and softer growth, it is typically bullish for bonds. Longer-term yields in the U.S. and Canada fell before and during the 1995–96 closures and stabilized at lower levels afterward.

2013: The 16-Day Shutdown Under a Debt Ceiling Shadow

Context: After 17 years of calm, brinkmanship returned in October 2013. Congress deadlocked on funding and the debt ceiling. From October 1 to October 16, the government partially shut down, while an October 17 debt limit deadline loomed. House Republicans sought to delay or defund the Affordable Care Act. Ratings agencies issued warnings about governance risk following the 2011 downgrade.

Bond Market Before: Yields had risen in the summer taper tantrum, then eased when the Fed did not taper in September. By late September, the U.S. 10-year was near 2.6 percent, down from above 3 percent. Canada’s 10-year was about 2.7 percent in September and near 2.52 percent in early October. Short-term bills maturing after the deadline saw yields jump, while bills maturing before it traded at a premium.

During Shutdown: The Treasury market stayed steady. Over the 16 days, the U.S. 10-year slipped by roughly 2 basis points. Across the last three shutdowns, the average move was about minus 5 basis points. Canadian 10-year yields also edged down, from roughly 2.70 percent in September to 2.52 percent in October. The safe-haven bid was mild, but visible. The Treasury continued to pay coupons and hold auctions, and investors expected a last-minute deal.

Aftermath: Once funding and the debt ceiling were resolved, yields refocused on Fed policy. The Fed began tapering in December 2013, and the U.S. 10-year finished the year near 3 percent. Canada’s 10-year rebounded to about 2.67 percent by December. Any shutdown dip was brief and overshadowed by fundamentals. Equities even rose about 3 percent during the closure. Lesson for 2013: a shutdown with debt ceiling risk can rattle bills, but 5- and 10-year yields typically drift lower, then reset to macro drivers once the government reopens.

2018–2019: Record-Length Shutdown and Market Turmoil

Context: The last shutdowns prior to 2025 occurred under President Trump. A 3-day closure in January 2018 was followed by a 35-day partial shutdown from December 22, 2018 to January 25, 2019, over border wall funding. There was no debt ceiling fight, but markets were volatile and monetary policy was shifting. Equities fell sharply in late 2018 as concerns about a slowdown rose.

Bond Market Before: Through 2017 and most of 2018, the Fed and Bank of Canada raised rates and yields climbed. The U.S. 10-year peaked near 3.2 percent in November 2018 and Canada’s near 2.4 percent. By December, stocks were down almost 20 percent from their highs, the Fed hiked once more, then signaled a more dovish stance.

During Shutdown: Yields fell.  From mid-December 2018 to late January 2019, the U.S. 10-year Treasury yield fell from roughly 2.9% to about 2.7%, briefly touching 2.56% on January 3, 2019. Canada’s 10-year slid from about 2.40 percent in November to near 1.95 percent by late January. Five-year yields moved in parallel as markets priced future cuts. A Fed pause signal in early January amplified the rally. Trade tensions and the equity selloff also supported safe-haven demand. With the debt ceiling suspended, T-bills saw no stress and Treasury payments continued.

Aftermath: Following January 25, attention shifted back to Fed easing and slowing growth. The U.S. 10-year fell below 2 percent by summer 2019; Canada’s reached about 1.3 percent by August. Stocks rebounded as policy turned easier. The episode reinforced the pattern: shutdowns tend to support bond prices, while lasting yield moves follow macro forces rather than political theater. Treasuries remained the safe asset of choice, with Canadian bonds benefiting in sympathy.

2025: Another Shutdown – What History Tells Us

Context: As of October 1, 2025, the United States entered a federal shutdown after Congress failed to pass stopgap funding, amid disputes over spending levels and Affordable Care Act subsidy extensions. Partisan gridlock and the failure of last-minute bills have revived familiar risks. With inflation near target and both central banks cautious about growth, investors are watching for spillovers to U.S. and Canadian bond markets.

Outlook after resolution: History suggests that once funding is restored and the debt ceiling is raised, markets refocus on fundamentals and shutdown effects fade. Political noise can add short-term volatility, but past episodes point to modestly lower yields during the lapse. With the United States no longer universally AAA-rated, governance concerns are not new. As long as the Treasury continues to meet debt obligations, Treasuries and Government of Canada bonds remain core safe havens.

Duration still matters. A drawn-out shutdown or a genuine default risk would first deepen the flight to quality, then risk market fatigue if resolution looked doubtful. In 2011, default fears alone drove the 10-year down about 0.6 percentage points while equities fell. A similar pattern could emerge if the 2025 debt limit comes into question. The base case remains an eleventh-hour deal that avoids default. If so, any shutdown rally should unwind gradually, and yields would drift back toward pre-shutdown levels as federal operations resume and delayed data clarify the trend. From there, U.S. and Canadian yields will track inflation, central bank policy, and growth, not Washington drama.

Bottom Line

Since 1976, U.S. government shutdowns have generally been short-term events for bond investors. Yields typically decline as investors shift into Treasuries, and Canadian 5- and 10-year bonds follow suit. Once the shutdown ends, markets return to trading on fundamentals such as inflation and central bank policy. Unless a shutdown escalates into a full credit crisis, which policymakers have consistently avoided, the impact on borrowing costs has remained modest and temporary.

The 2025 episode fits this history. Shutdowns tend to create safe-haven demand for U.S. and Canadian government bonds, with any decline in yields reversing after funding is restored. The lesson is clear: investors should watch Washington for near-term volatility but focus on inflation trends and central bank decisions, which ultimately determine the path of yields. A shutdown may delay the next move in rates, but it rarely defines it.

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