Treasuries rise on Democrat win as traders await refunding plan

[SINGAPORE] Treasuries rallied as the Democrats won control of the US House, pointing to a political environment that may limit the Trump administration’s tax and spending plans.

Yields fell across the curve, led by those on five-year notes which dropped as much as nine basis points to 4.67 per cent. Benchmark 10-year yields were down six basis points to 4.9 per cent, while a gauge of the US dollar weakened 0.4 per cent. 

A Democratic takeover of the House would create a divided government, reducing the likelihood of further deficit-expanding legislation under the Trump administration.

Bond investors have been uneasy about the US’ fiscal trajectory with the nation’s debt load at around US$40 trillion, and a gridlock may reduce the risk of additional spending or tax cuts that would require more Treasury issuance. 

“A divided government just speaks to less fiscal spending than we’ve seen in the last few years,” said Brij Khurana, portfolio manager at Wellington Management.

“Typically when we get a divided government, it has been historically pretty good for Treasuries.”

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While the results of the midterms will matter for the longer-term trajectory of bond supply, traders are also awaiting the Treasury’s quarterly issuance plans due Wednesday (Nov 4).

With several key Senate races still to be called, Democrats appear all but certain to have unified control of Congress, setting up the first real check on Trump’s power in Washington since he returned to the White House two years ago.

Several news organisations projected that Democrats would win a majority of the chamber.

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A Democratic sweep of both chambers would give the party greater control of the legislative agenda although Trump would retain his veto and substantial executive powers.

A split Congress is expected to result in more gridlock, which could curb Trump’s ability to pass major legislation. 

For Nathan Thooft, a senior portfolio manager at Manulife Investment Management, more gridlock “likely means less fiscal impulse, potentially lower yields, and one less tailwind for the (US) dollar”.

The price action on Wednesday reverses the previous day’s losses, when Treasury yields climbed after a better-than-expected report on US job openings bolstered the case for more US Federal Reserve interest rate hikes. Traders are also awaiting payrolls data due on Friday.

“If the magnitude of a Democratic sweep is larger than we expected and pushback on artificial intelligence is larger than we expected, that could have growth implications,” said Eric Stratmoen, strategist at Payden & Rygel.

“The biggest thing for me is going to be on the state level watching the AI reaction and pushback, especially in Texas and Ohio.”

Traders are also focused on Wednesday’s quarterly refunding announcement. Wall Street is now girding for the biggest revamp in guidance for US Treasuries issuance since early 2024.

Many dealers expect the Treasury to alter the guidance in its quarterly policy statement, which for more than two years has laid out steady plans for note and bond issuance.

A shift in the announcement could pave the way for potential cuts in 2027 to sales of the longest-dated debt, balanced by bigger auctions of bills and shorter-term notes.

Relying even more heavily on bills, which mature in up to a year, to meet expanding funding needs at some point is likely to test the appetite of investors.

With rapidly maturing bills having to be refunded constantly, the US now auctions in excess of half a trillion dollars in any given week, leaving the Treasury exposed to sudden swings. BLOOMBERG