- Bond investors are skeptical that a likely split Congress after the Nov. 3 midterms will ease US fiscal worries the way gridlock has for decades. Since the mid-1990s, 10-year yields have been lower on average one and 12 months after midterms that produced a divided government, Bloomberg data show.
- The fiscal gap is the problem: the budget deficit is roughly 6% of GDP, debt held by the public tops $32 trillion and net interest costs have hit a record above $1 trillion, more than the defense budget. TD Securities expects the deficit to rise to 6.4% of GDP in fiscal 2027 from 5.9%, an increase of 0.5 percentage point (Lumida calculation), even with gridlock.
- Ten-year Treasury yields approached 5.4% this month, the highest since 2002, before falling below 5% last week on concerns about AI companies. Diamond Hill’s Henry Song said “the risk is for rates to go higher” because two years of impasse would keep adding debt.
- MUFG’s George Goncalves sees a Democratic wave potentially bringing more AI regulation, which could support Treasuries by hurting stocks and reducing AI-linked debt sales. Franklin Templeton’s Sonal Desai is neutral on US debt, saying, “We just have profligates in power.”
What Happened?
Polls suggest Democrats will win control of at least one chamber of Congress in the Nov. 3 midterms, while falling short of the votes needed to override President Trump’s veto. In the past, that kind of split government has been bullish for Treasuries because it makes major spending bills harder to pass. This time, investors argue that merely avoiding new spending is not enough, and that Congress would need to raise revenue or cut spending to improve the fiscal story. Bonds have had a bruising year, with the Iran war lifting energy prices and the Fed raising rates for the first time in three years.
Why It Matters?
If gridlock no longer brings long yields down, mortgage rates, corporate borrowing costs and equity valuations will stay under pressure from the long end of the curve. Heavy government debt issuance is also competing with surging corporate bond sales to fund the AI boom. DWS Americas’ George Catrambone warned that more shutdowns or a dysfunctional Congress would leave the outcome in the bond market’s hands.
What’s Next?
The day after the election, the Treasury announces its quarterly refunding plans, and some analysts speculate officials could shrink longer-maturity auctions and sell more T-bills to help lower yields. TD Securities notes that a Democratic Congress with a Republican president has historically flattened the yield curve, led by longer maturities. SMBC’s Joseph Abate said a bigger blue sweep could lead investors to demand higher yields if it brings more spending.
Affected Tickers and Coins: TLT, IEF
Source: Bloomberg
