US Government Funding Resolution: Market Volatility, Bond Yields, and Sector Impacts

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The US government funding resolution remains a focal point of market attention in early February 2026. Following a partial government shutdown that began January 31, 2026, Congress is actively working to finalize the fiscal year 2026 appropriations package [1]. This analysis examines the potential impacts on market volatility, Treasury yields, and sector-specific investment opportunities.

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Congress has made significant progress but the final appropriations bill remains unresolved. As of early February 2026:

Status	Details
Appropriations Bills	6 bills sent to House; 5 under consideration; 1 remaining pending [1]
House Dynamics	Six separate appropriations bills with a “take-it-or-leave-it” Homeland Security package [1]
Senate Actions	Passed a package; sent back to House for final approval [1]
Continuing Resolution	A 2-week CR expected for DHS while final bill is debated [1]
Timeline	Week of Feb 2-8: House review; Feb 9-15: House-Senate negotiations and final vote [1]

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The CBOE Volatility Index (VIX) increased 3.3% to

on February 2, 2026, reflecting elevated market uncertainty [2]. Major indices showed mixed performance:

Index	Level	Change
Dow Jones Industrial Average	48,892.47	-0.4%
S&P 500	6,939.03	-0.4%
Nasdaq Composite	23,461.82	-0.9%

Research indicates that government shutdowns create short-term uncertainty, often triggering defensive investor behavior [3]. Key observations from historical shutdowns:

• Immediate Volatility Spike
  : Global markets experienced sharp volatility increases immediately after the January 31, 2026 shutdown began, particularly in technology and healthcare stocks [4]
• Policy Uncertainty
  : The shutdown’s policy uncertainty feeds into broader geopolitical risks, amplifying short-term market swings [4]
• Historical S&P 500 Performance
  : During the 2025 shutdown, the S&P 500 actually rose 2.4%, suggesting markets may price in resolution expectations [3]

Factor	Expected Impact
Short-term	Elevated VIX as funding uncertainty persists
Resolution announcement	Rapid volatility decline as risk premium evaporates
Extended uncertainty	Sustained elevated volatility with potential sector rotation

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Maturity	Yield	Change
2-year	3.553%	-2.8 bps
10-year	4.239%	+1.2 bps
30-year	4.867%	Flat
2yr-10yr Spread	+68.4 bps	Steepening

: The bond market exhibits heightened volatility with price movements tied to interest rate, inflation, and credit risks during funding uncertainty periods [5].

: The steepening curve reflects expectations of higher short-term rates relative to long-term rates, a pattern consistently observed during past shutdowns [5].

: Treasury auctions become critical gauge points during shutdown periods. The $44 billion 7-year note auction in late January was closely monitored, with analysts noting it could push yields to their highest level since July [5].

• Wait-and-See Stance
  : Investors adopted a cautious approach, with yields slipping as markets digested Fed policy and shutdown concerns [5]
• Commodity Influence
  : Rising oil and copper prices, partly due to geopolitical tensions, supported further yield curve steepening [5]
• Dollar Dynamics
  : The dollar showed underlying weakness as market participants anticipated potential Fed rate cuts in 2026 [6]

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Sector	Impact	Key Factors
Defense	Pressure on contractors	Procurement delays; stalled contract approvals; uncertain long-term project timelines [4]
Technology	Federal contracts stalled	Defense and cybersecurity service contracts delayed; heightened compliance costs from DoD’s CMMC 2.0 [4]
Healthcare	Non-essential programs suspended	HHS programs affected; funding gaps increasing risk perception [4]
Industrials	Moderate decline (XLI: -0.3%)	Federal workforce delays; hiring freezes impacting sectors with federal talent [1]
Materials	Significant decline (XLB: -1.9%)	Infrastructure project postponements [2]

Sector	Investment Thesis
Defensive Assets	Utilities, consumer staples, high-quality dividend payers attract capital inflows when public-sector funding models appear fragile [4]
Cybersecurity Infrastructure	Regulatory risks (FAR changes, CMMC 2.0) push capital toward compliance tools and cybersecurity [4]
Domestic Supply Chain	Long-term uncertainty about government contracts benefits companies with robust domestic sourcing [4]

For investors seeking exposure to defense equities, several ETFs show promising risk-reward profiles [7]:

ETF	Analyst Rating	Top Holdings with Upside
ARKX (Space & Defense)	Moderate Buy	SRTA (+94%), ACHR (+54%), JD Logistics (+43%)
PPA (Invesco Aerospace & Defense)	Moderate Buy	AIRO (+72%), AXON (+32%)

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Strategy	Implementation
Defensive Positioning	Increase allocation to utilities, consumer staples, and high-quality dividend stocks
Volatility Management	Use VIX derivatives or volatility-targeting strategies during uncertainty periods
Duration Management	Consider shorter-duration bonds to mitigate yield volatility

• Short-Term
  : Monitor for buying opportunities in defense contractors if resolution appears imminent
• Medium-Term
  : Position for “risk-on” rotation once funding clarity is established
• Long-Term
  : Reassess domestic supply chain and cybersecurity exposure based on evolving regulatory environment

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Indicator	Trigger for Action
VIX Level	Above 20 indicates elevated fear; below 15 suggests calm
2-year Treasury Yield	Sharp movements signal Fed expectations shifts
Defense ETF Flows	Inflows suggest risk appetite for government-linked stocks
Congressional Activity	Vote schedules indicate resolution timeline

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The US government funding resolution process introduces measurable but typically manageable market volatility. Historical patterns suggest:

1. Volatility spikes are typically short-lived
   once funding clarity emerges
2. Bond markets show yield curve steepening
   during uncertainty periods
3. Defensive sectors outperform
   during the uncertainty phase
4. Resolution typically catalyzes risk-on positioning
   , benefiting cyclical and growth sectors

Investors should maintain flexibility to adjust allocations as the funding resolution unfolds, with particular attention to the timing of congressional votes and their impact on market sentiment.

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[1] Federal News Network - “Despite progress in Congress, the final stretch of the 2026 appropriations process is far from simple” (https://federalnewsnetwork.com/congress/2026/02/despite-progress-in-congress-the-final-stretch-of-the-2026-appropriations-process-is-far-from-simple/)

[2] Finviz - “Stock Market News for Feb 2, 2026” (https://finviz.com/news/295673/stock-market-news-for-feb-2-2026)

[3] AInvest - “Assessing the Impact of U.S. Government Shutdowns on Financial Markets” (https://www.ainvest.com/news/assessing-impact-government-shutdowns-financial-markets-fiscal-policy-risk-2602/)

[4] AInvest - “Assessing the Impact of the 2026 U.S. Government Partial Shutdown” (https://www.ainvest.com/news/assessing-impact-2026-government-partial-shutdown-homeland-security-market-volatility-2602/)

[5] Fidelity Fixed Income - “TREASURIES-US yields dip as investors look to payrolls” (https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202601291156RTRSNEWSCOMBINED_L1N3YU0VE_1)

[6] Petersen Custom Farming - “Dollar Recovers on Hopes a Government Shutdown Can Be Avoided” (https://www.petersencustomfarming.ca/news/story/37300961/dollar-recovers-on-hopes-a-government-shutdown-can-be-avoided)

[7] TipRanks - “3 Defense ETFs Set to Rise in 2026” (https://www.tipranks.com/news/3-defense-etfs-set-to-rise-in-2026)