I'm LongbridgeAI, I can summarize articles.According to Zhitong Finance APP, as the U.S. midterm elections draw near, investors are closely monitoring potential shifts in congressional control. However, Wall Street generally holds that the deteriorating U.S. fiscal situation is unlikely to see fundamental improvement, whether Republicans maintain control of Congress or Democrats secure a majority. Against the backdrop of federal debt surpassing $40 trillion and persistently high Fiscal Deficits, the U.S. government's borrowing needs are expected to remain elevated in the coming years, exerting continuous pressure on the U.S. Treasury market.
Since the beginning of this year, the worsening U.S. fiscal outlook has eroded investor confidence in U.S. Treasuries. As government debt continues to expand and interest expenses climb, the market anticipates that the U.S. Treasury will need to issue more bonds to fill budget gaps. Data shows that the U.S. 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 U.S. fiscal outlook remain the current massive deficit size, accumulating debt, and rising interest costs. He believes that even if Democrats win the midterm elections, it may not change the overall strategy of the U.S. Treasury to finance the deficit.
Democrats Poised to Regain Congressional Control, but Fiscal Deficit Unlikely to Narrow Significantly
After Republicans controlled both the White House and Congress for two consecutive years, market predictions suggest Democrats are poised to make a breakthrough in these midterm elections. According to data from prediction markets Kalshi and Polymarket, Democrats winning majorities in both the Senate and the House of Representatives is seen as the most likely outcome of Tuesday's election.
Recent polls show Democrats leading Republicans by 11 percentage points, further bolstering hopes for Democrats to seize control of Congress. However, some Wall Street institutions remain cautious about the election results. Nomura Securities expects a scenario where the two parties separately control the Senate and the House, with significant uncertainty still surrounding the Senate race.
Analysts point out that if Democrats control both chambers, it could limit the Trump administration's ability to implement further tax cuts and curb growth in certain discretionary fiscal expenditures.
However, this does not mean the U.S. Fiscal Deficit will decline significantly. Spending on welfare programs such as Social Security and Medicare, along with increasing interest payments on national debt, will continue to drive up the federal government's borrowing demands.
George Bory, Chief Fixed Income Investment Strategist at Allspring Global Investments, stated that the structure of U.S. government spending 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.
Democratic Victory Could Briefly Benefit Treasuries and Dollar; Continued Republican Control Raises Concerns
Although U.S. fiscal issues are difficult to resolve in the short term, some investors believe that Democratic advantages in the congressional elections could still provide some support for U.S. Treasuries and the U.S. dollar.
Bory pointed out that if Democrats control Congress, the Trump administration may need to make more compromises on fiscal policy, thereby limiting some new spending initiatives. He stated that Democratic control of Congress could flatten the trend of government spending growth, as bipartisan compromise might result in cutting spending on projects the President wishes to promote. "Overall, the growth rate of government spending may begin to slow, which could be a positive factor for the bond market."
He believes this change could particularly benefit long-term U.S. Treasuries, as long-term bond yields are more sensitive to fiscal prospects and the sustainability of government debt.
Karl Schamotta, Chief Market Strategist at Corpay, stated that if Democrats perform strongly in the election, the U.S. dollar could receive short-term support. He believes that Democrats gaining more congressional seats could alleviate investor concerns about the Trump administration's fiscal, trade, and foreign policies, thereby reducing the risk premium required by the market for holding U.S. assets.
However, not all institutions believe a Democratic victory is conducive to controlling fiscal spending.
In a recent research report, Pacific Investment Management Company (Pimco) pointed out that U.S. government spending is likely to continue increasing regardless of which party wins the election, and the Fiscal Deficit may further expand.
Libby Cantrill, Head of Public Policy at Pimco, stated that if Democrats regain control of the Senate, future government spending could even increase further, as Democrats would have greater influence in negotiations over the debt ceiling and fiscal spending.
In contrast, some analysts believe that continued Republican control of both the Senate and the House could be the least desirable outcome for the U.S. Treasury market.
Although Republicans have long advocated for tax cuts, shrinking government size, and controlling fiscal spending, these policies have not always resulted in lower Fiscal Deficits or debt levels in actual implementation.
Steve Englander, Head of G10 FX Research and North America Macro Strategy at Standard Chartered Bank, stated that investors no longer view the Republican Party as effective in restraining fiscal spending. He believes that if Republicans continue to control both houses of Congress, U.S. Treasury prices could face negative reactions.
Debt Ceiling Negotiations Pose Greater Risk; Threat of Government Shutdown Persists
Compared to the election results themselves, investors are more concerned about future political conflicts surrounding the debt ceiling and government spending. If a divided Congress emerges after the midterms, Democrats and Republicans may engage in more intense bargaining over fiscal spending, tax policies, and the debt ceiling. This could not only increase uncertainty in fiscal negotiations but also raise the risk of the U.S. government falling into a prolonged funding deadlock.
Currently, the U.S. Congress has postponed contentious negotiations over fiscal year 2027 spending arrangements until after the midterm elections, setting December 11 as the deadline to reach a government funding agreement. If the two parties fail to reach an agreement in time, the U.S. government could once again face the risk of a partial shutdown.
The U.S. debt ceiling issue is expected to return to the market spotlight by the end of 2027. Although the key date for the U.S. Treasury to hit the debt ceiling constraint, known as the "X-date," is not expected until late 2027, Democrats may use this juncture as a bargaining chip, demanding concessions from Republicans on fiscal spending and tax policies in exchange for support to raise the debt ceiling.
Analysts warn that if the two parties remain deadlocked on these issues, it could exacerbate investor concerns about U.S. fiscal governance capabilities and further undermine market confidence in U.S. Treasuries.
$40 Trillion Debt Looms; Fiscal Issues May Become Market Focus for Next Two Years
Overall, Wall Street believes that while the U.S. midterm elections may alter the marginal direction of fiscal policy, they are unlikely to fundamentally reverse the trend of continuous government debt expansion.
Regardless of which party controls Congress, the U.S. will continue to face structural challenges such as growing welfare spending, rising interest costs on national debt, and persistently high Fiscal Deficits. The potentially narrow margin in congressional seats also means that neither side will find it easy to push through large-scale fiscal reforms.
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 is likely to be very slim, so the market should not expect a fundamental shift in U.S. fiscal policy.
He expects that U.S. government bond issuance volumes and Fiscal Deficit issues will receive increasing attention over the next two years. "I believe that in the next two years, market focus on government debt issuance and Fiscal Deficits will further intensify."
For investors, the midterm elections may influence the trends of U.S. Treasuries and the U.S. dollar in the short term, but what truly determines the long-term performance of U.S. assets remains whether the government can control the Fiscal Deficit, slow debt growth, and curb the rising burden of interest payments.