US bonds rally as Democrat sweep seen stalling spending

Treasuries experienced a rally on Wednesday, as projections indicated that Democrats would take control of Congress, leading investors to anticipate government spending cuts, according to analysts. The prospect of AI regulation slowing growth and reducing the need for rate hikes also contributed to the bond surge. Relief over President Donald Trump's promise to give $5,000 to US adults not materializing, coupled with a flight to safety in bonds as stock markets fell, further supported the move.

The benchmark 10-year Treasury yields dropped about 5 basis points to 4.90%, while 2-year yields hit a near two-month low of 4.5458%. The decline in yields indicates that bond prices rose. Fed funds futures showed a slight increase, reducing expectations for Federal Reserve rate hikes next year. Trump's proposal for a $5,000 payment to adult citizens would have cost $1.2 trillion or 16% of the federal budget.

"Even though that was considered a 5% tail risk, that’s now gone," remarked 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." A Republican president with Democrats controlling both chambers of Congress would likely frustrate spending plans and potentially lead to a modest reduction in overall spending.

Additionally, an expected slowdown in AI development could also temper growth. The lower yields contributed to the US dollar's decline while concerns about an AI slowdown negatively impacted tech shares in Asia. Prashant Newnaha, senior rates strategist at TD Securities in Singapore, observed that bonds were emerging as the clear winner as markets sidelined the AI trade and embraced the higher likelihood of tax cuts being put on hold and government spending slowing.