TREASURIES-US bonds rally as Democratic sweep seen stalling spending

Treasuries rallied on Wednesday as the Democrats seized control of both the Senate and House, leaving investors to weigh possible gridlock in Washington which could limit government ‌spending, while AI regulation could slow growth and reduce the need for rate hikes.

Relief that President Donald Trump's promise to hand out $5,000 to US adults would not be coming to pass also helped, analysts said. Benchmark 10-year Treasury yields were last down by 2.1 basis points (bps) to 4.9291%, and ‌2-year yields fell almost 1.2 bps to 4.6017%. They had earlier dropped more sharply to an almost two-month low as stock markets pulled ‌back, but retraced those moves as global equities turned positive. Yields fall when bond prices rise.

Trump had promised a $5,000 payment to adult citizens if Republicans held on to Congress, a promise worth $1.2 trillion, or 16% of the federal budget. "Even though that was considered a 5% tail risk, that's now gone," said Andrew Lilley, chief rates strategist ⁠at Barrenjoey, an ​investment bank based in Sydney. "If it ⁠had happened, it would have been a cataclysmic reaction from Treasuries."

Lilley said a Republican president with Democrats in control of both houses of Congress would frustrate spending plans ⁠and probably result in a modest reduction in overall spending, while an expected brake on AI development could also slow growth. "It now looks more likely that ​the Democrats can win in 2028 and if so regulation in AI will take off," he said, something which the Fed ⁠would probably see as a reason not to hike.

Money markets slightly reduced expectations for Federal Reserve rate rises next year, according to LSEG data. The lower yields dragged on ⁠the ​US dollar while nerves about an AI slowdown caused tech shares to wobble.

"Bonds are coming out as the clear winner as markets put the AI trade on the chopping block and embrace the higher possibility that further tax cuts are put on ice and government spending ⁠slows," said Prashant Newnaha, senior rates strategist at TD Securities in Singapore. However, strategists and analysts warned that inflation risks, which bond markets are ⁠sensitive to, still persist as markets await ⁠next moves in the US-Iranian war.

"The threat of renewed US strikes continues to hang over markets, with potentially significant implications for oil prices, inflation and investor sentiment," Janet Mui, head of market analysis at RBC ‌Brewin Dolphin, said.