US bonds rally as Democrat sweep seen stalling spending
- Benchmark 10-year Treasury yields fell about 5 basis points (bps) in Tokyo trade to 4.90% and 2-year yields dropped
Treasuries rallied as investors anticipate reduced government spending due to a divided Congress and potential AI regulation, leading to lower bond yields and tempered Fed rate hike expectations.
- Impact of a divided Congress on government spending.
- How AI regulation could influence economic growth.
- Reasons behind the rally in benchmark Treasury yields.
SINGAPORE: Treasuries rallied on Wednesday as projections the Democrats would take control of Congress had investors expecting gridlock in Washington to cut government spending, while AI regulation could slow growth and reduce the need for rate hikes.
Relief that President Donald Trump’s promise to hand out $5,000 to US adults would not be coming to pass, and a flight to the safety of bonds as stock markets slid, also helped, analysts said.
Benchmark 10-year Treasury yields fell about 5 basis points (bps) in Tokyo trade to 4.90% and 2-year yields dropped a tad further to a nearly two-month low of 4.5458%.
Yields fall when bond prices rise.
Fed funds futures rallied, reducing slightly the market expectations for Federal Reserve rate rises next year.
Trump had promised a $5,000 payment to adult citizens if his Republicans held on to Congress, a promise worth $1.2 trillion or 16% of the federal budget.
“Even though that was considered a 5% tail risk, that’s now gone,” said Andrew Lilley, chief rates strategist at Barrenjoey, an investment bank based in Sydney.
“If it had happened, it would have been a cataclysmic reaction from Treasuries.”
Democrats capture Congress in sweeping setback for Trump
Lilley said a Republican president with Democrats in control of both houses of Congress would frustrate spending plans and probably result in a modest reduction in overall spending, while an expected brake on AI development could also slow growth.
“It now looks more likely that the Democrats can win in 2028 and if so regulation in AI will take off,” he said, something which the Fed would probably see as a reason not to hike. The lower yields dragged on the US dollar while nerves about an AI slowdown hit tech shares in Asia.
“Bonds are coming out as the clear winner as markets put the AI trade on the chopping block and embrace the higher possibility that further tax cuts are put on ice and government spending slows,” said Prashant Newnaha, senior rates strategist at TD Securities in Singapore.