US midterm elections, which determine control of Congress, generate less hype than presidential races, but the bond market takes notice. In many cases, bond prices rise and yields fall when midterms produce divided government, a state of gridlock that tends to mean lower government spending.
The pattern has played out before. In 1994, when Republicans swept Congress midway through President Bill Clinton's first term, yields eased dramatically and fell by more than 200 basis points over the following 12 months. In 2018, when Democrats flipped the House of Representatives to create a split Congress under the first Trump administration, yields fell for most of the rest of the year. Monetary policy and economic conditions also mattered in both cases, but Congress holds the purse strings.
The Republicans control both the House and Senate, yet Kalshi traders favour Democrats winning majorities in both chambers next week. Steve Englander at Standard Chartered believes a larger-than-expected Democratic sweep would also ease pressure on yields, given Democrats have positioned themselves against AI data centres. "We might have [a] reaction where the market says, 'Wait a second, the investment in AI is going to cool down,'" Englander said.
A Republican surprise sweep could jolt bonds in the opposite direction. Englander warned that control of both chambers would let Republicans pass another finance bill through reconciliation, adding that their recent fiscal record is weak. Gridlock does not negate other factors, such as the energy shock from the Iran war, but in an environment of high nominal growth, high deficits and persistent inflation, a little gridlock could be especially soothing for bond markets.
Source: Financial Times Markets · Summarized by HeadlinesBriefing