The autumn has taken the U.S. Treasury (UST) market on a rather volatile ride. After posting multi-decade high-water marks in early October, the UST 10-year note has since rallied considerably, pushing the yield down 50bp. We’ve been opining on what factors have been impacting Treasury yields over the last few weeks and months, and now there’s another development on this front that needs to be addressed: the midterm election results.

With one week gone by since the election, market participants are probably getting a somewhat clearer perspective on what the “Blue Tsunami” means, or for that matter doesn’t mean, for the direction of interest rates. First up, it should have no meaningful impact on the Fed. Indeed, the much better-than-expected October jobs report combined with the hotter CPI data probably results in a rate hike in the December FOMC meeting.

What about the potential fiscal policy outlook, you may be asking? Interestingly, the day after the election, the bond market rallied with the narrative being that Democratic control of Congress would prevent any future fiscal stimulus plans coming from the Republican side of the ledger. In other words, a budget deficit-friendly outcome. In my opinion, this was a misplaced judgment because the odds always seemed to favor a divided Congress anyway after the midterms, with gridlock being the result.

As far as the next two years are concerned, a little lesson in PolySci 101 may be in order. Remember, Congress can pass legislation, but the president has the veto power, and it doesn’t look like the Democrats will have either a veto-proof or filibuster-proof majority when all is said and done. However, the Trump administration and congressional Democrats both have spending initiatives they’d like to see come to fruition. Could the seeds of a deal be sown?

On the Trump administration’s side, there is a preference for an increase in defense spending, while the Democrats would probably like to raise domestic agency spending (SNAP/food stamps) and renew Obamacare subsidies. All of this comes against the backdrop of looming deadlines on the budget, as well as the debt ceiling.

If a deal can be had, there will more than likely be little chance it is paid for by tax hikes. Thus, the budget deficit could actually expand. And even if no deal occurs, the fiscal policy law of the land for the next two years, at a minimum, is already in place due to the passage of the One Big Beautiful Bill Act (OBBBA). The OBBBA could also marginally increase the nation’s red ink total over that time, and don’t forget that increased coupon auction sizes as a result are a matter of when and how, not if.

Conclusion

The bottom-line message is that while the midterm election results have captured a great many headlines, the actual outcome from a fiscal policy perspective may not mean all that much for the direction of UST yields. Against this backdrop, we continue to see the UST 10-year yield trading in a 4.50%–5.25% range.