With an oversupply of government debt available in the capital markets, it could push rates even higher as Treasury notes need to offer more attractiveness to prospective buyers via higher yields compared to other higher-yielding assets like corporate bonds.
How Will Markets Respond?
If political analysts are correct and that the Democrats take control of the House of Representatives and the Republicans maintain the Senate, it may not even matter to the capital markets, according to some analysts.
“Our base case implies slightly weaker fiscal stimulus and growth, as well as little reason to expect friendlier trade policy, which translates, in our view, to downside risk to Treasury yield,” said Karen Reichgott, junior economist at Goldman Sachs. “That said, there has been a lot of focus on how many seats the Democrats can maintain in the Senate, so if Republicans gain more than a slim majority, we could see higher yields even under a divided Congress. Implications for the Dollar appear more ambiguous.”
However, analysts are also not quick to dismiss the impact of the elections whether the tangible impact on the markets relatively unnoticed or not.
“The reaction this year may be different than in the past, particularly given the lower sensitivity of markets to elevated political uncertainty in recent years (based on historically low volatility) and the current fiscal boost likely to fade over the coming years, both of which are unusual around midterm elections,” said Reichgott. “Our equity strategists have also noted that relevant sectors and baskets appear to be pricing few changes to the direction of policy, in line with our expectations.”
For more market news, visit ETFTrends.com.