Bond investors are increasingly doubtful that a return of political gridlock in Congress will alleviate concerns over the US fiscal trajectory, unlike in previous decades. Polls suggest Democrats are likely to gain control of at least one chamber in the upcoming midterm elections, but fall short of overriding President Trump’s veto power. Historically, a split Congress has been bullish for Treasuries by limiting major spending legislation and curbing budget deficits.
However, this time, the fiscal challenge is too severe. The federal budget deficit stands at roughly 6% of the economy, with public debt surpassing $32 trillion. Rising interest rates have pushed annual net interest costs above $1 trillion, exceeding the defense budget.
Portfolio managers argue that mere legislative paralysis is insufficient; active policy measures are needed to raise revenue or reduce spending. Without such action, long-term bond yields may continue to rise. The 10-year Treasury yield recently approached 5.4%, the highest since 2002, driven by inflation concerns, energy prices from the Iran war, and massive government debt issuance.
Some analysts believe a Democratic wave could lead to AI regulation, slowing the economy and supporting bonds, but many remain cautious.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing