US borrowing outlook steadies after midterms, but Treasury yields face new tests: analysts
After the Democrats swept the US midterm elections, a divided government may help restrain future Treasury borrowing and prevent fresh deficit blowouts, though it will not necessarily bring down elevated bond yields, analysts say. The US Treasury Department unveiled its quarterly refunding statement on Wednesday, with market participants describing the overall borrowing outlook as largely…
After the Democrats gained a majority in the US midterm elections, analysts believe a divided government may help curb future Treasury borrowing and curb deficit growth, though it will not necessarily lower bond yields, reports indicate. The US Treasury Department released its quarterly refunding statement on Wednesday, with market participants describing the overall borrowing outlook as largely neutral.
The Treasury Department stated it anticipates maintaining note and bond auction sizes consistent with the upcoming quarters, keeping the 30-year bond auction at $25 billion, as seen in the May and August rounds.
According to analysts, this stance is likely to persist as a divided government significantly restricts the scope for new unfunded fiscal packages. Swiss private bank Julius Baer's team, led by Dario Messi, noted that while the midterm election outcome does not resolve US fiscal challenges, it reduces the risk of another discretionary increase in the deficit over the next two years.
Even though the estimated deficit will remain elevated at around 5.7% of gross domestic product in 2027, with long-term fiscal policy and Treasury supply projected to stay constrained, other market factors could continue pushing yields upward, analysts cautioned.
Long-dated US Treasury yields have risen over the past two years, hitting a multi-year high of 5.36% in October, driven by persistent inflation and increased investment in artificial intelligence. The 10-year US Treasury note, used as a benchmark for mortgage rates, climbed to about 5.36% in early October. Matthew Ryan, head of market strategy at foreign exchange specialist Ebury, stated that Treasury yields are likely to remain elevated as long as Iran's war continues and inflation expectations stay high.
While the main focus remains on the lingering inflation, analysts are also closely monitoring the financing demands resulting from the AI investment cycle. The 30-year Treasury yield dipped to around 5.23% on Wednesday, falling from an early October peak of 5.732% due to a tech stock sell-off and heightened safe-haven demand. Messi's team suggests that the debate surrounding AI investments is likely to intensify in the coming months and years.
They argue that any slowdown in capital expenditure expectations would lead to lower growth forecasts and modest issuance needs.
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