U.S. voters headed to the polls on Tuesday and as expected by most analysts, the Democrats successfully took the majority in the House of Representatives, which could prove beneficial to the bond markets.
While the general consensus is that political gridlock will benefit the capital markets, Capital Alpha Partners president Chuck Gabriel, posits that a Democratic majority in the House will be a boon to the bond markets moving forward as government spending could increase.
“I think Democrats are the more bond market-friendly party,” said Gabriel. “To the extent that there’s a lot of suspense about the Fed or angst about the Fed, that split government thing is not really that bad, unless we get a confluence of events that force the need for austerity.”
The 2018 Midterm Election results didn’t surprise analysts in political and economic circles, but as a post-midterm election rally ensued in U.S. equities, benchmark Treasury notes headed the opposite direction. After a volatile October month for both stocks and bonds, U.S. equities were the beneficiaries of the rally as the Dow Jones Industrial Average gained over 450 points as of 2:40 p.m. ET.
Bond prices rose as benchmark Treasury yields mostly ticked lower–the 10-year note went down to 3.202 and the 30-year note followed, heading lower to 3.409.
As the Democrats gained control of the House and Republicans maintained majority in the Senate, the markets did as expected with no curveballs thrown.
“Markets have more time to digest the U.S. midterm election outcome, but we don’t expect shocking moves. The split U.S. Congress was by and large discounted. The slightly softer U.S. yields and dollar overnight suggest a setback in the reflation trade, but it’s merely splitting hairs,” said analysts at KBC Bank, in a note. “We don’t expect a lasting impact.”
Rate Increases Poised to Resume
On Wednesday, the Federal Reserve began their two-day monetary policy meeting, and the markets are still expecting that rate hikes will ensue come December. In addition, analysts can foresee benchmark yields rising above their current levels.
“I think 3.5 percent to 3.75 percent is easy and unfortunately it would be nice to say that’s because the economy is great and everything is great and nominal GDP is 5 to 6 percent and we’re getting higher interest rates,” Boockvar told CNBC’s “Futures Now” on Tuesday.
High-Yield Bond ETFs Gain
Other post-midterm election winners were high-yield bond ETFs, such as the iShares iBoxx $ High Yield Corp Bd ETF (NYSEArca: HYG) and the ProShares High Yield—Interest Rate Hdgd (BATS: HYHG). HYG rose 0.45%, while HYHG gained 0.35%.
HYG tracks the investment results of the Markit iBoxx® USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality. HYS seeks to provide total returns that closely correspond to the ICE BofAML 0-5 Year US High Yield Constrained Index, which is comprised of U.S. dollar denominated below investment grade corporate debt securities publicly issued in the U.S. domestic market with remaining maturities of less than 5 years.
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade, but by targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
Related: South Africa ETF’s Woes Can Continue
For more trends in fixed income, visit the Fixed Income Channel.