US midterm elections unlikely to resolve fiscal predicament! Debt exceeds US$40 trillion, Wall Street worries US Treasury market may remain under pressure.

As the US midterm elections approach, investors are closely watching possible changes in congressional control, but Wall Street generally believes that whether Republicans retain control of Congress or Democrats win a majority, the US's deteriorating fiscal condition will be difficult to fundamentally improve. With federal debt exceeding US$40 trillion and fiscal deficits remaining persistently high, the US government's borrowing needs over the next several years are expected to remain elevated, putting continued pressure on the US Treasury market. Since the start of this year, the deterioration in the US fiscal outlook has weakened investors' confidence in US Treasuries. As government debt continues to expand and interest expenses keep climbing, the market expects the US Treasury will need to issue more bonds in the future to fill budget gaps. Data show that the US fiscal deficit for fiscal year 2026 reached about US$1.99 trillion, the highest level in five years, with the deficit expected to remain at about 6% of gross domestic product (GDP). Chris Maxey, chief market strategist at Wealthspire, said the key factors determining the US fiscal outlook remain the current massive deficit scale, accumulating debt and rising interest costs. He believes that even if Democrats win the midterm elections, it may not necessarily change the US Treasury's overall strategy for financing the deficit. Democrats Poised to Regain Congressional Control, but Fiscal Deficit Unlikely to Narrow Significantly After Republicans controlled both the White House and Congress for two consecutive years, the market expects Democrats may make a breakthrough in this midterm election. According to data from prediction markets Kalshi and Polymarket, Democrats winning majorities in both the Senate and House is seen as the most likely outcome of Tuesday's election. Recent polls show Democrats leading Republicans by 11 percentage points, further strengthening hopes that Democrats can contest control of Congress. However, some Wall Street institutions remain cautious about the election outcome. Nomura expects a possible situation in which the two parties split control of the Senate and House, with the Senate race still subject to considerable uncertainty. Analysts noted that if Democrats control both chambers, they could restrict further tax cuts by the Trump administration and curb growth in some discretionary fiscal spending. But that does not mean the US fiscal deficit will fall significantly. Spending on welfare programs such as Social Security and Medicare, as well as rising interest payments on government debt, will continue to drive up federal borrowing needs. George Bory, chief investment strategist for fixed income at Allspring Global Investments, said the structure of US government spending has become quite rigid, and fiscal deficits are expected to remain at a high level in the coming years. Therefore, even if congressional control changes, it may not significantly reduce the government's financing needs. Democratic Victory Could Be Short-Term Positive for Treasuries and the Dollar; Continued Republican Control Instead Raises Concerns Although US fiscal problems are difficult to resolve in the short term, some investors believe that a Democratic advantage in congressional elections could still be somewhat positive for US Treasuries and the dollar. Bory noted that if Democrats control Congress, the Trump administration may need to make more compromises on fiscal policy, thereby limiting some new spending programs. He said Democratic control of Congress could flatten the growth trend in government spending, because a bipartisan compromise may result in cuts to some programs the president wants to promote. "Overall, the pace of government spending growth may begin to slow, which could be a positive factor for the bond market." He believes this change may be especially positive for long-term US Treasuries, because long-term bond yields are more sensitive to the fiscal outlook and the sustainability of government debt. Karl Schamotta, chief market strategist at Corpay, said that if Democrats perform strongly in the elections, the dollar could gain support in the short term. He believes that more congressional seats for Democrats could ease investors' concerns about the Trump administration's fiscal, trade and foreign policies, thereby reducing the risk premium the market demands for holding US assets. However, not all institutions believe a Democratic victory would help control fiscal spending. Pacific Investment Management Company (Pimco) noted in a recent research report that no matter which party wins the election, US government spending is likely to continue increasing and the fiscal deficit may further expand. Libby Cantrill, head of public policy at Pimco, said that if Democrats retake control of the Senate, future government spending could even increase further, because Democrats would have greater influence in negotiations over the debt ceiling and fiscal spending. By contrast, some analysts believe continued Republican control of both the Senate and House may be the outcome the US Treasury market least wants to see. Although Republicans have long advocated tax cuts, smaller government and control of fiscal spending, the related policies have not always led to lower fiscal deficits or debt levels in actual implementation. Steve Englander, head of G10 FX research and North America macro strategy at Standard Chartered, said investors no longer regard Republicans as a party capable of effectively restraining fiscal spending. He believes that if Republicans continue to control both chambers of Congress, US Treasury prices could face a negative reaction. Debt Ceiling Negotiations May Become a Bigger Risk; Threat of Government Shutdown Remains Compared with the election outcome itself, investors are more concerned about future political conflicts over the debt ceiling and government spending. If a divided Congress emerges after the midterm elections, Democrats and Republicans may engage in more intense bargaining over fiscal spending, tax policy and the debt ceiling. This could not only increase uncertainty in fiscal negotiations but also raise the risk of the US government falling into a prolonged funding impasse. At present, the US Congress has postponed contentious negotiations over fiscal year 2027 spending arrangements until after the midterm elections and set December 11 as the deadline for reaching a government funding agreement. If the two parties fail to reach an agreement in time, the US government could again face the risk of partial agency shutdowns. The US debt ceiling issue is expected to return to the market spotlight by the end of 2027. Although the key date on which the US Treasury is expected to hit the debt ceiling constraint, the so-called "X-date," is not expected until late 2027, Democrats may use this point as a bargaining chip to demand concessions from Republicans on fiscal spending and tax policy in exchange for support needed to raise the debt ceiling. Analysts warn that if the two parties remain deadlocked on related issues, it could intensify investors' concerns about US fiscal governance capacity and further weaken market confidence in US Treasuries. US$40 Trillion Debt Burden; Fiscal Issues May Become Market Focus for the Next Two Years Overall, Wall Street believes the US midterm elections may change the marginal direction of fiscal policy, but will be difficult to fundamentally reverse the trend of continued expansion in government debt. No matter which party controls Congress, the US will continue to face structural challenges such as growth in welfare spending, rising Treasury interest costs and persistently high fiscal deficits. The possible relatively narrow congressional seat margin in the future also means that neither party will find it easy to push through large-scale fiscal reform. Chip Hughey, managing director of fixed income at Truist Wealth, said that no matter which party ultimately wins the Senate and House, the control advantage may be very slim, so the market should not expect a fundamental shift in US fiscal policy. He expects that over the next two years, US government bond issuance scale and the fiscal deficit issue will attract increasing attention. "I think that over the next two years, market attention to government debt issuance and the fiscal deficit will heat up further." For investors, the midterm elections may influence the short-term direction of US Treasuries and the dollar, but what truly determines the long-term performance of US assets remains whether the government can control the fiscal deficit, slow debt growth and curb the rising interest burden.