Treasury Yields Fall, Dollar Weakens as Democrats Lead in Early US Midterm Vote Count
Summary
- US Treasury yields fell and the dollar weakened as Democrats took an early lead in the U.S. midterm elections.
- Markets are analyzing whether Democratic control of Congress could reduce the chances of additional tax cuts and expanded fiscal spending, easing the burden of Treasury issuance.
- Analysts said political gridlock, the Treasury issuance plan, and upcoming US employment data will be key variables for the direction of US Treasury yields and the dollar.
Forecast Trend Report by Period
Treasuries rallied and the dollar weakened as early vote counting in the U.S. midterm elections showed Democrats holding an early lead.
Bloomberg reported on Nov. 3 that U.S. Treasury yields fell broadly ahead of further election results and the Treasury Department’s quarterly borrowing plan. The five-year yield dropped 7 basis points to 4.69%, while the 10-year yield fell 6 basis points to 4.90%. A gauge of the dollar slipped 0.2%.
Markets are focused on the prospect that a Democratic majority in the House could curb fiscal expansion under President Donald Trump’s administration. With U.S. national debt at about $40 trillion, a split in congressional power could lower the chances of additional tax cuts or expanded fiscal spending, easing pressure for further Treasury issuance.
Andrew Ticehurst, a senior rates strategist at Nomura, said early election returns and prediction markets were raising the odds of Democrats winning both chambers. That scenario is typically negative for the dollar and supportive of Treasuries.
On prediction market Kalshi, the odds of Democrats taking control of the House stood at about 97%, while the probability of winning the Senate was about 86%. Investors are therefore also weighing the possibility that Democrats could secure both chambers of Congress.
Nathan Tuft, a senior portfolio manager at Manulife Investment Management, said deeper political gridlock in Congress could reduce the impact of fiscal stimulus and put downward pressure on Treasury yields and the dollar. Breeze Khurana, a portfolio manager at Wellington Management, said divided government has historically been broadly favorable for the U.S. Treasury market.
The bond market is also watching the U.S. Treasury Department’s quarterly borrowing plan. Wall Street expects the department could make its biggest adjustment to issuance guidance since early 2024. In particular, market participants are discussing a plan to reduce long-term debt issuance starting in 2027 while increasing bill issuance and the size of shorter-term auctions.
Treasury yields rose the previous day after stronger-than-expected job openings data underscored the possibility of additional rate increases by the Federal Reserve. Investors are now looking to the borrowing plan and Friday’s U.S. jobs report for clues on the path of interest rates.
