Chart of the Week: Bond investors may cheer gridlock

{"text":[[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":7.47,"text":"Good morning. US midterm elections, which determine the control of Congress, don’t generate as much hype as presidential elections. But the bond market takes notice. In many cases, bond prices rise (and so yields fall) when midterms result in divided government — that is, gridlock, which tends to mean lower government spending."}],[{"start":27.24,"text":"Some examples: in 1994, when Republicans pulled off a dramatic sweep of Congress in the middle of President Bill Clinton’s first term, yields eased dramatically immediately afterwards and fell by more than 200 basis points in the following 12 months. In 2018, when Democrats flipped the House of Representatives to create a split Congress under the first Trump administration, yields fell for most of the remainder of the year. Of course, monetary policy and economic conditions also were important factors in both cases — but it is Congress that holds the purse strings."}],[{"start":61.32,"text":"The Republicans control both the House and Senate, but Kalshi traders favour the Democrats winning majorities in both next week. Steve Englander at Standard Chartered believes a larger than expected Democratic sweep of Congress would also ease pressure on bond yields through another contentious issue on ballots: AI data centres, which Democrats have positioned themselves against. “We might have [a] reaction where the market says, ‘Wait a second, the investment in AI is going to cool down.’ This takes more of the pressure off bond yields,” Englander explains."}],[{"start":92.4,"text":"Meanwhile, a Republican surprise sweep could jolt the bond market in the opposite direction, according to Englander. “If somehow Republicans were able to pull it off and keep control of the House and the Senate, I think there’d be a very bad reaction in the bond market, because that would mean that they’d be able to pass a finance bill through reconciliation again,” he said. “Their record over the last couple of years is not [good] on the fiscal responsibility side.”"}],[{"start":118.44,"text":"Gridlock doesn’t negate other macroeconomic conditions, such as the energy shock from the Iran war. But in an environment of high nominal growth, high deficits and persistent inflation, a little gridlock could be particularly soothing for bond markets."}],[{"start":118.94,"text":"Good reads:"}],[{"start":133.28,"text":"Hakyung: “There was nothing — nothing — in the world more important than this e-mail”"}],[{"start":133.78,"text":"Rob: The decline of Halloween candy"}],[{"start":134.28,"text":"Katie: ‘swisstony’ is back"}],[{"start":134.78,"text":"Daire: $1.2tn?"}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":152.04,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1793444332_9282.mp3"}