Treasuries rallied this morning as markets digested the midterm results. The 10-year yield slipped about 5 bps to roughly 4.90%, the 2-year fell to near 4.57%, and the 30-year eased to around 5.29%.
The bond market’s read is about fiscal policy, not politics. With Congress now controlled by a different party than the White House, new spending and deficit expansion are expected to be harder to pass. Deutsche Bank’s Jim Reid noted that divided government has historically made fiscal stimulus more difficult, and that markets now price roughly 50 bps of Fed hikes through 2027, down from pre-election levels. Societe Generale’s Phoenix Kalen added that tighter fiscal limits could ease some pressure on yields.
Context matters. U.S. debt recently topped $40 trillion, and that concern has kept yields elevated all year. Even after falling about 33 bps over the past month, the 10-year is still up roughly 75 bps since January. A sharp drop in oil prices today added another tailwind.
Gridlock doesn’t guarantee lower yields, but today the bond market priced in fiscal restraint.
Sources: CNBC, Morningstar, Reuters, U.S. Department of the Treasury, CNN
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