Democrats winning control of both houses of US Congress at the Nov. 3 midterm election is the outcome that would most likely set up a bond rally, according to the latest Markets Pulse survey. More than half of the 301 respondents to a poll conducted Oct. 2-17 said they expect Treasury yields would fall over the 12 months after a Democratic sweep. Separately, when asked about the outcome from a split Congress, 36% expected yields to decline.
Just 26% see a fall in yields if both houses are controlled by Republicans. Conversely, an all-Republican Congress would provide the best outlook for stocks, with more than 60% of participants saying they expect the S&P 500 to rise in the year following such a result. Democrats were seen as the most bearish option for stocks, with 58% of participants expecting a decline in the S&P 500 over 12 months on a sweep.
That’s mainly because they’re seen as more likely to support regulation slowing the AI boom — something that also has the potential to hurt growth, which would boost the appeal of bonds. A sweeping anti-AI takeaway from the midterms “could have an impact on growth,” said Robert Waldner, CIO and co-head of fixed income at Invesco Advisers Inc. That will likely cause a rally in Treasuries as well, he added. Voters appear likely to hand Democrats a majority at least in the House of Representatives — the party had an eight-point lead over Republicans amid registered and likely voters in a Washington Post-ABC News-Ipsos poll published Oct. 18.
The outlook for the Senate is less certain. In terms of the pace of stock gains — which were at an average rate of about 1.3% per month for the S&P 500 through the end of September — 65% of respondents said Republican control of Congress would see it accelerate or stay about the same. That compares to 37% for a Democrat-controlled Congress and 44% for a split.
A prolonged battle over raising the debt ceiling next year would predominantly make itself known in higher Treasury yields, according to the Pulse. Nearly half of all respondents said a selloff in bonds would be the biggest market consequence of such a fight. If the Democrats take back control of the House, you’re going to see less fiscal policies being passed, which should keep rates contained, said Eric Souza, senior portfolio manager at Capital Advisors Group Inc. The bigger thing for next year is going to be the debt ceiling issue coming up again.
The law limits how much money the Treasury can borrow to meet federal spending obligations, and it regularly comes up against the cap. The current borrowing authority is on track to run out in the second half of 2027. Nearly 60% of respondents said foreign policy — in particular the war with Iran — poses the biggest risk in the 12 months after midterms.
On the other hand, ending the war with Iran was cited by 42% of respondents as the largest potential benefit to US assets. Trump posted on social media a few weeks ago to say the US would not attack Iran ahead of the midterms. Tensions in the Middle East have continued to ebb and flow, however.
The administration has been making efforts to combat high diesel and gasoline prices, particularly as voters get ready to head to the polls. On the regulatory front, increased rulemaking around data centers and artificial intelligence — a hot-button issue for constituents on both sides of the political aisle — is likely to derail US stocks. More than 60% of respondents said if Congress is in a position to regulate AI more strictly, stocks will suffer over the ensuing 12 months as earnings expectations for big tech companies, which have been significant drivers of recent rallies, get tamped down.
Democrats have raised alarm bells about AI safety, and increased backlash to data centers has members of both parties considering more regulation around their co...
Source: Bloomberg Markets · Summarized by HeadlinesBriefing