- Bonds rallied on the prospect of gridlock. Treasury yields fell across the curve as Democrats won control of both chambers of Congress, led by the five-year yield, which dropped as much as 9 basis points to 4.67%, implying a starting level of about 4.76% by our calculation. The 10-year yield fell 2 basis points to 4.94%, and a gauge of the dollar weakened 0.3%.
- The fiscal story drove the move. A Democratic House means a divided government and less chance of more deficit-expanding laws from the Trump administration, at a time when US debt is around $40 trillion. “Typically when we get a divided government, it has been historically pretty good for Treasuries,” said Wellington Management’s Brij Khurana.
- Part of the rally faded. Bonds gave back most of their gains heading into the Asian afternoon, which some attributed to a reversal of haven buying. Global X ETFs’ Justin Lin called it “mostly opportunistic dip buying since we’re now past peak midterm election uncertainty.”
- The refunding is the next big test. The Treasury publishes its quarterly issuance plans on Wednesday, and Wall Street is bracing for the biggest change in guidance since early 2024. Many dealers expect wording that could open the way for cuts to the longest-dated debt sales in 2027, offset by larger bill and shorter-term note auctions.
What Happened?
Wednesday’s rally reversed the previous day’s losses, when yields rose after a better-than-expected job openings report strengthened the case for more Federal Reserve rate hikes. Democrats flipped at least six Senate seats and won House races in districts Republicans easily carried in 2024. Trump still keeps his veto and broad executive powers, but a split Congress is expected to bring more gridlock. Manulife Investment Management’s Nathan Thooft said more gridlock “likely means less fiscal impulse, potentially lower yields, and one less tailwind for the dollar.”
Why It Matters?
For bond investors, the election and the refunding point the same way: fewer long bonds. Divided government makes new spending or tax cuts that require more issuance less likely, while a shift to bills would cut the supply of duration. The catch is that leaning more on bills, which mature within a year and must be rolled constantly, tests investors’ appetite and leaves the Treasury exposed to sudden swings, as the US already sells more than half a trillion dollars of debt in a typical week. Payden & Rygel’s Eric Stratmoen also warned that bigger-than-expected pushback on AI, especially at the state level in Texas and Ohio, could have growth implications.
What’s Next?
Traders will focus first on the refunding statement and whether the Treasury drops its long-standing guidance on steady note and bond sizes. Friday’s payrolls report is the next big test for rate-hike expectations after the strong job openings data. If the five-year rally holds, that would suggest the market sees the election as lowering fiscal risk, not just a one-day haven trade. Bloomberg’s Brendan Fagan noted that a Democratic Congress could challenge parts of the US exceptionalism story over time if it alters AI investment, but called that a longer-dated risk.
Affected Tickers and Coins: TLT, IEF, SHY, UUP
Source: Bloomberg
