Macro

Treasuries rally as investors bet a Democratic Congress will limit spending

Bond investors expect divided government to limit new spending and tax cuts. Some also expect AI regulation to slow growth, which would reduce the need for Fed hikes. Deficits and inflation could cap the rally.

By James Mitchell · Nov 4, 2026, 10:45 AM EST

Why it matters: Bond investors now expect less new spending and possibly fewer Fed rate hikes under divided government, though deficits and inflation still pose risks.

For information only, not investment advice.

Treasuries rallied on Wednesday after Democrats won control of both the Senate and the House, Reuters reported. Bond investors are betting on two things: that gridlock in Washington will limit government spending, and that tighter AI regulation could slow growth and reduce the need for Federal Reserve rate hikes.

Two-year yields fell to an almost two-month low before giving back some of the drop as global stocks turned positive, Reuters reported. Money markets slightly trimmed their bets on Fed hikes next year, and the dollar slipped.

Bonds also lost a tail risk. Trump had promised $5,000 payments to adult citizens if Republicans held Congress, a pledge Reuters put at $1.2 trillion, or 16% of the federal budget.

Not everyone expects the rally to run far. Vontobel said persistent deficits and heavy Treasury issuance could limit how far long-term yields fall. Andrew Jackson, Vontobel's chief investment officer, said divided government could support Treasuries by limiting spending, but that blocking new spending isn't the same as reducing the existing deficit, RankiaPro reported.

Jackson added that inflation and Fed policy will probably matter more for bonds than the election did.

Janet Mui of RBC Brewin Dolphin warned of another risk: renewed US strikes on Iran could move oil prices and inflation.

Tags: treasury · interest-rates · elections · congress · fed