As the US midterm elections approach, investors are closely watching for potential changes in congressional control, but Wall Street broadly believes that regardless of whether Republicans retain control of Congress or Democrats win a majority of seats, the deteriorating US fiscal situation will be difficult to fundamentally improve. With federal debt surpassing $40 trillion and fiscal deficits remaining persistently high, the US government's borrowing needs over the coming years are expected to remain elevated, placing continued pressure on the Treasury market.
Since the start of this year, the worsening US fiscal outlook has eroded investor confidence in US Treasuries. As government debt continues to expand and interest expenses keep climbing, the market expects the US Treasury will need to issue more bonds to fill the budget gap. Data shows that the US fiscal deficit for fiscal year 2026 reached approximately $1.99 trillion, the highest level in five years, with the deficit-to-GDP ratio expected to remain around 6%. Chris Maxey, Chief Market Strategist at Wealthspire, stated that the key factors determining the US fiscal outlook remain the massive current deficit, accumulating debt, and rising interest costs. He believes that even if Democrats win the midterm elections, it may not necessarily change the Treasury's overall strategy for financing the deficit.
After Republicans controlled both the White House and Congress for two consecutive years, market forecasts suggest Democrats are poised to make breakthroughs in this midterm election. According to data from prediction markets Kalshi and Polymarket, Democrats winning majorities in both the Senate and House is seen as the most likely outcome of Tuesday's elections. Recent polls show Democrats leading Republicans by 11 percentage points, further strengthening hopes of Democrats contesting for congressional control. However, some Wall Street institutions remain cautious about the election results. Nomura Securities expects a scenario where the two parties split control of the Senate and House, with Senate races still carrying significant uncertainty. Analysts note that if Democrats control both chambers, it could limit the Trump administration's further tax cuts and restrain some discretionary fiscal spending growth. But this does not mean the US fiscal deficit will significantly decline. Spending on welfare programs such as Social Security and Medicare, along with increasing Treasury interest payments, will continue to drive up federal government borrowing needs. George Bory, Chief Fixed Income Investment Strategist at Allspring Global Investments, stated that the US government spending structure has become quite rigid, and fiscal deficits are expected to remain at high levels in the coming years. Therefore, even if congressional control changes, it may not significantly reduce the government's financing needs.
Although US fiscal problems are difficult to resolve in the short term, some investors believe that Democrats gaining an advantage in congressional elections could still provide some support for US Treasuries and the dollar. Bory noted that if Democrats control Congress, the Trump administration may need to make more compromises on fiscal policy, thereby limiting some new spending programs. He stated that Democratic control of Congress could slow the growth trend of government spending, as bipartisan compromise may result in cuts to some programs the President hopes to advance. "Overall, the pace of government spending growth may begin to slow, which could be a positive factor for the bond market." He believes this change could particularly benefit long-term US Treasuries, as long-term bond yields are more sensitive to fiscal outlook and government debt sustainability. Karl Schamotta, Chief Market Strategist at Corpay, stated that if Democrats perform strongly in the elections, the dollar could receive short-term support. He believes that Democrats gaining more congressional seats could ease investor concerns about the Trump administration's fiscal, trade, and foreign policies, thereby reducing the risk premium the market demands for holding US assets. However, not all institutions believe a Democratic victory would help control fiscal spending. Pacific Investment Management Company (Pimco) noted in a recent research report that regardless of which party wins the election, US government spending is likely to continue increasing, and fiscal deficits may further expand. Libby Cantrill, Head of Public Policy at Pimco, stated that if Democrats retake Senate control, future government spending could even increase further, as Democrats would have greater influence in debt ceiling and fiscal spending negotiations. In contrast, some analysts believe that Republicans continuing to control both chambers could be the outcome the Treasury market least wants to see. Although Republicans have long advocated for tax cuts, smaller government, and fiscal spending restraint, related policies have not always delivered lower fiscal deficits or debt levels in practice. Steve Englander, Head of G10 FX Research and North America Macro Strategy at Standard Chartered Bank, stated that investors no longer view Republicans as a party capable of effectively restraining fiscal spending. He believes that if Republicans continue to control both chambers, US Treasury prices could face a negative reaction.
Compared to the election results themselves, investors are more concerned about future political conflicts over the debt ceiling and government spending. If a divided Congress emerges after the midterm elections, Democrats and Republicans may engage in more intense battles over fiscal spending, tax policy, and the debt ceiling. This could not only increase uncertainty in fiscal negotiations but also raise the risk of the US government falling into a prolonged funding stalemate. Currently, the US Congress has postponed contentious negotiations over fiscal year 2027 spending arrangements until after the midterm elections and set December 11 as the deadline for reaching a government funding agreement. If the two parties fail to reach an agreement in time, the US government could once again face the risk of partial agency shutdowns. The US debt ceiling issue is expected to return to market focus by the end of 2027. Although the key date when the Treasury reaches the debt ceiling constraint, the so-called "X date," is not expected to arrive until late 2027, Democrats may use this as a bargaining chip to demand Republican concessions on fiscal spending and tax policy in exchange for support needed to raise the debt ceiling. Analysts warn that if the two parties remain deadlocked on related issues, it could exacerbate investor concerns about US fiscal governance capability and further weaken market confidence in US Treasuries.
Overall, Wall Street believes the US midterm elections may change the marginal direction of fiscal policy but are unlikely to fundamentally reverse the trend of continued government debt expansion. Regardless of which party controls Congress, the US will continue to face structural challenges including growing welfare spending, rising Treasury interest costs, and persistently high fiscal deficits. The likely relatively narrow margin of congressional seats also means neither party can push through large-scale fiscal reform. Chip Hughey, Managing Director of Fixed Income at Truist Wealth, stated that regardless of which party ultimately wins the Senate and House, the margin of control may be very slim, so the market should not expect a fundamental shift in US fiscal policy. He expects that over the next two years, the scale of US government bond issuance and the fiscal deficit issue will attract increasing attention. "I believe that in the next two years, market attention to government debt issuance and fiscal deficits will further intensify." For investors, the midterm elections may influence US Treasury and dollar movements in the short term, but what truly determines the long-term performance of US assets is whether the government can control fiscal deficits, slow debt growth, and curb the ever-rising interest burden.
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