U.S. fiscal outlook weighs on investors ahead of midterm vote

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U.S. fiscal outlook ahead of midterms

Highlights

U.S. national debt exceeds $40 trillion with the 2024 budget deficit near $2 trillion, or 6% of GDP, regardless of election outcome.
Investors expect entrenched government spending and rising interest costs to keep borrowing elevated, making sharp deficit reductions unlikely in coming years.
The upcoming debt ceiling deadline on December 11 poses a larger market risk than midterm election results, with a split Congress likely increasing negotiation challenges.

Election scenarios and borrowing outlook

As reported by Reuters, investors see little chance that next week's congressional election result will materially improve the federal budget picture, even as control of the House and Senate remains in focus. The national debt has topped $40 trillion, the deficit is expected to remain near 6% of gross domestic product, and this year's budget gap stands at about $2 trillion.

If Republicans retain control, investors expect continued pressure on public finances. If Democrats take Congress, analysts say political gridlock could limit new tax cuts or discretionary spending increases, but rising costs tied to Social Security, Medicare and interest payments are still expected to keep borrowing elevated.

Chris Maxey, chief market strategist at Wealthspire, says the core issue remains the size of the current deficit, the amount of debt outstanding and the rising interest costs attached to it. George Bory, chief investment strategist for fixed income at Allspring Global Investments, says government spending is already deeply embedded, making a sharp reduction in borrowing needs unlikely over the next few years.

Treasury market risks and broader asset impact

Weakening confidence in U.S. Treasuries has already reflected concern over the fiscal path, and investors say the election may only marginally change that view. Some see a Democratic gain in either chamber as slightly supportive for Treasuries and the dollar over the long term if it leads to more compromise on spending, while others warn that a Republican hold on both chambers could pressure bond prices because markets no longer treat the party as a reliable force for fiscal restraint.

Karl Schamotta, chief market strategist at Corpay, says Democratic strength could support the dollar in the short term by easing investor concern over President Donald Trump's fiscal, trade and foreign policies. Pimco, in a recent research note, says spending is likely to rise under either election outcome and the deficit is likely to widen, especially if Democrats gain more leverage in debt ceiling and budget negotiations.

Investors also point to the debt ceiling as a larger market risk than the election result itself. Congress has delayed a fight over fiscal 2027 spending until after the midterms, with a December 11 deadline for a funding agreement, and a split Congress could make future negotiations over spending and the borrowing limit more contentious.

We previously reported on how long-term Treasury yields moving above 5% are intensifying pressure on the U.S. budget and households, as higher rates feed into mortgage costs and federal interest expenses while annual deficits hover near $2 trillion. That piece explained that with likely political gridlock after the midterms, a near-term fiscal deal to meaningfully curb borrowing looks difficult even as total U.S. debt approaches $40 trillion and higher rates make deficit reduction harder.

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