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 350 points as of 1:15 p.m. ET. Bond prices rose as benchmark Treasury yields mostly ticked lower across the board.
The 10-year note went down to 3.189 and the 30-year note followed, heading lower to 3.392. The two-year note ticked up to 2.936, while the five-year note edged down to 3.042.
As the Democrats gained control of the House of Representatives and the 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.”
Political analysts were expecting a split Congress following the post-midterm election results, which would increase political gridlock–general consensus is that this typically benefits the capital markets. However, market analysts predicted that this political divide would do little in terms of impacting the capital markets.
“We think a gridlock environment for an economy poised to decelerate makes it harder now for the full term structure to keep rising,” George Goncalves, head of fixed-income strategy at Nomura Securities International, said in an emailed statement. “In the short run, this does not change the trajectory of the Fed, so curves should flatten. In the more medium term, we still believe that 10-year rates can make another move above 3.25 percent, but our conviction is lower now.”
However, as the Federal Reserve begins their two-day monetary policy meeting on Wednesday, it’s still expected 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.
Related: 3 ETFs to Capture Post-Midterm Election Gain
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