A Democratic victory in the US midterm elections could deliver a short-lived boost to government bonds before triggering a potentially damaging rise in borrowing costs, as Washington heads towards another confrontation over America’s mounting national debt, according to Nigel Green, chief executive of financial advisory group deVere.
Green believes investors may initially welcome the prospect of a divided Congress, anticipating that political gridlock will constrain major spending legislation and push Treasury yields lower.
But he warns that the apparent relief could prove temporary, with a looming debt-ceiling battle in 2027 potentially forcing Republicans and Democrats into an expensive compromise that leaves the federal government borrowing substantially more.
“The first instinct of bond investors will be to cheer gridlock,” Green said.
“A split Congress normally means fewer big spending bills, so yields will probably dip once the results are in.
“I think investors would be wrong to relax. This time, gridlock is likely to push US borrowing up, and markets aren’t pricing that yet.”
The warning comes as US federal debt stands above $40tn, with the Treasury expected to reach its borrowing limit around the middle of 2027 on its current trajectory. Congress will then face pressure to raise or suspend the ceiling, setting up another potentially bruising political confrontation over government finances.
A Democratic victory in the House of Representatives would give the party greater leverage in negotiations, while control of the Senate as well would strengthen its position considerably.
Green argues that both parties would enter the negotiations with expensive political demands. Republicans would seek additional defence funding, while Democrats would push to reverse Medicaid cuts included in last year’s budget legislation.
“Both sides will arrive at the table wanting something expensive,” he said.
“Republicans want more money for defence. Democrats want to reverse the Medicaid cuts in last year’s budget law. In today’s Washington, nobody wants to be seen to blink, so the likeliest compromise gives each side what it wants and leaves the Treasury to borrow the difference.”
Some estimates suggest a settlement along those lines could increase the US deficit by around 1 per cent of gross domestic product.
That prospect could create a volatile pattern for bond markets. Treasury prices may initially rise and yields fall after the election, only for investors to reassess the country’s fiscal outlook as the debt-ceiling deadline approaches and the cost of securing a political agreement becomes clearer.
Green said the concern was not simply the additional borrowing, but what repeated fiscal compromises would signal to investors about Washington’s willingness to control its finances.
“If every compromise in Washington ends with a bigger deficit, lenders will want paying more to hold long-dated US debt,” he said.
“Long-term borrowing costs go up, the yield curve steepens, and once that gets going it can get away from policymakers very quickly.”
The implications would extend well beyond the US government bond market. Long-term Treasury yields help determine borrowing costs across the global economy, influencing mortgage rates, corporate financing and the valuations investors place on equities.
Higher yields can make future company earnings less attractive in present-value terms, placing particular pressure on highly valued growth and technology stocks. Businesses also face more expensive financing, while households can find mortgage borrowing increasingly costly.
“Long-dated Treasury yields feed into almost everything,” Green said. “Mortgage rates, company borrowing costs, and share valuations all take their cue from them. When they climb for the wrong reasons, highly valued growth stocks usually feel it first.”
He believes the bond market could ultimately have a greater influence on investment performance in 2027 than the sector-by-sector consequences of a Democratic victory.
The prospect of renewed concerns over US fiscal discipline could also strengthen demand for assets traditionally viewed as alternatives to government-issued money and conventional financial markets.
Gold has long attracted investors seeking protection against political and monetary uncertainty, while Bitcoin has increasingly been promoted by supporters as an alternative store of value. Green expects both could benefit if Washington becomes embroiled in a prolonged funding dispute.
“When doubts grow about how a government handles its finances, investors look for places to put money that sit beyond its reach,” he said.
“Gold has long played that role, and Bitcoin increasingly does too. A drawn-out fight over America’s debt would, in my view, likely strengthen the case for both as part of a diversified approach.”
Even a Democratic sweep of Congress would not remove the president’s veto powers or broad executive authority. It would, however, constrain the White House’s legislative freedom and potentially intensify negotiations over spending and borrowing.
For investors, Green’s central warning is that an initial market rally should not be mistaken for an improvement in America’s long-term fiscal position.
“America has always been able to borrow on the strength of its name,” he said.
“Every funding fight that ends in a bigger bill spends a little of that reputation, and it’s far harder to earn back than it is to lose.”
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