Democrats captured control of both the Senate and the House in the midterm elections, offering a brief respite to the recently pressured US Treasury market.
With Congress now in a divided government configuration, the legislative prospects for the Trump administration's large-scale tax cuts and expansionary fiscal spending plans have narrowed sharply, giving bond investors temporary relief from persistent deficit concerns.
Meanwhile, the US Treasury is set to release its quarterly refinancing statement on Wednesday, and Wall Street is closely watching what could be the largest adjustment to government debt issuance policy since early 2024.
Following the midterm election results, Treasury yields fell across the board. The 5-year Treasury yield briefly dropped 9 basis points to 4.67%, the 10-year benchmark yield declined 2 basis points to 4.94%, and the dollar index softened by approximately 0.3% in tandem.
Brij Khurana, a portfolio manager at Wellington Management, stated, "A divided government means fiscal spending will be less than in past years, and historically, that has typically been a positive for Treasuries." Nathan Thooft, a senior portfolio manager at Manulife Investment Management, also noted that more political gridlock "could mean fewer fiscal shocks, potentially lower yields, and one less support factor for the dollar."
Divided Government Cuts Fiscal Expansion Expectations, Treasuries Get Short-Term Boost
According to Decision Desk data projections, Democrats will secure 52 of the Senate's 100 seats, reclaim Senate control, and are expected to retake the House, restoring full control of Congress.
The direct impact of a divided Congress lies at the legislative level. Trump will retain veto power and considerable executive authority, but the legislative pathway for large-scale tax cuts or further expansionary fiscal spending will be significantly constrained. The bond market has interpreted this positively — US public debt has approached $40 trillion, and any legislative risk that could push up the deficit and thereby increase Treasury issuance has been one of the primary sources of pressure on the bond market recently.
Eric Stratmoen, a strategist at Payden & Rygel, cautioned that the market also needs to watch a potential structural risk: if Democrats create greater obstacles to artificial intelligence development at the state level, it could affect medium- to long-term economic growth expectations. Brendan Fagan, a strategist at Bloomberg Markets Live, also noted, "Democratic control of Congress could over time erode part of the US economic exceptionalism narrative, especially if it affects AI investment and growth — but that is a longer-cycle risk."
Wall Street Awaits Refinancing Statement, Long-Bond Issuance Reduction Path in Focus
Beyond the election results, the market is more focused on the quarterly refinancing statement to be released on Wednesday.
Since January 2024, the Treasury has maintained stable guidance on medium- and long-term government bond issuance, committing to keep bill and bond auction sizes unchanged for the coming quarters. Multiple primary dealers on Wall Street expect this statement may adjust that policy framework, paving the way for reducing long-term Treasury issuance in 2027 while expanding Treasury bill and shorter-dated government bond issuance to fill the financing gap.
Institutions show notable divergence in their assessments of the scale of adjustments. Citigroup expects the Treasury may directly reduce 20-year and 30-year Treasury issuance starting this month; Phoebe White, head of US rates strategy at UBS, believes a policy wording adjustment is more likely than an immediate change in auction sizes, with the bank expecting no actual issuance volume changes until at least May next year; JPMorgan holds the most conservative view, expecting issuance sizes to remain unchanged at least until August next year, after which new issuance would be concentrated in 2-year to 10-year Treasuries.
The Barclays strategist team suggests the Treasury could change the wording in its existing guidance from "at least the next several quarters" to "the next several quarters." While this wording adjustment may appear minor, it could preserve greater flexibility for the Treasury to adjust its issuance structure, essentially meaning it would no longer make an explicit commitment to stable issuance.
Growing Reliance on Short-Term Debt, Financing Structure Faces Absorption Test
If the Treasury reduces long-bond issuance, Treasury bills will bear a larger share of the financing burden.
As of September, Treasury bills had risen to approximately 22% of US outstanding marketable government debt, exceeding the long-term average of 20% recommended by the Treasury Borrowing Advisory Committee (TBAC).
Treasury bills with maturities of one year or less require frequent rolling over, meaning the Treasury must continuously secure market absorption. Currently, the US Treasury's weekly bill auction sizes have exceeded $500 billion, and the market's absorption capacity is facing a substantial test. April LaRusse, head of investment specialists at Insight Investment, pointed out that bond buybacks alone are unlikely to have sufficient market impact, and if the Treasury intends to push down yields, adjusting the government bond issuance structure would be a more direct tool.
Additionally, the market will be watching TBAC's discussion feedback, particularly assessments of whether the market can sustainably absorb larger-scale Treasury bill issuance. If existing issuance sizes are maintained, next week's three benchmark Treasury auctions will total $125 billion, including $58 billion in 3-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds.
Multiple Data Points Overlap, Bond Market Volatility Intensifies Recently
Wednesday's bond market movement is essentially a recovery from the previous decline. On Tuesday, boosted by stronger-than-expected US job openings data, the market bet on a more prolonged Federal Reserve rate hike path, and the 10-year Treasury yield climbed sharply that day. Investors this week also need to digest the nonfarm payrolls data due on Friday, which will be another key reference for judging the Fed's policy path.
Overall, the bond market currently faces multiple intertwined factors: Democratic control of Congress brings short-term fiscal consolidation expectations, but whether the divided government configuration can sustainably constrain fiscal expansion remains to be seen; the refinancing statement will provide clearer guidance on the government bond supply path; and the ongoing tug-of-war between Fed policy direction and economic data remains the core variable determining the yield center.
Comments