Democratic midterm win could leave US with a $40tn hangover
A Democratic victory in today’s US midterms could hand bond investors a brief party followed by a brutal hangover, warns the chief executive of one of the world’s largest independent financial advisory and fintech organisations.
Nigel Green, CEO and founder of deVere Group, believes Treasuries are likely to rally if Democrats take the House, and possibly the Senate. He predicts the mood will turn as Washington heads into a debt-ceiling fight in 2027 that could end with America borrowing far more.
“The first instinct of bond investors will be to cheer gridlock,” says Nigel Green.
“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.”
US federal debt now stands above $40tn. On its current path, the Treasury is expected to reach its borrowing limit around the middle of 2027, forcing the new Congress to strike a deal to raise or suspend the ceiling.
A Democratic House would give the party real leverage over the terms. Control of the Senate would strengthen its hand further.
“Both sides will arrive at the table wanting something expensive,” says the deVere CEO.
“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 deal of this kind could widen the US deficit by around 1% of GDP.
Bond investors could therefore see yields fall straight after the election, then climb back as the deadline approaches and the price of a deal becomes clear.
“I’m less concerned about the extra borrowing itself than about what it signals,” continues Nigel Green.
“If every compromise in Washington ends with a bigger deficit, lenders will want paying more to hold long-dated US debt.
“Long-term borrowing costs go up, the yield curve steepens, and once that gets going it can get away from policymakers very quickly.”
Long-term Treasury yields underpin borrowing costs across the global economy, from mortgages to corporate debt, and play a central role in how investors value shares.
“Long-dated Treasury yields feed into almost everything,” says Nigel Green.
“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.
“There’s been plenty of talk about which sectors win or lose under a Democratic Congress, but I suspect the bond market will have a bigger say in how 2027 plays out.”
The deVere CEO also expects fresh questions over America’s fiscal discipline to support demand for assets that sit outside the traditional system.
“When doubts grow about how a government handles its finances, investors look for places to put money that sit beyond its reach,” he explains.
“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 with Democrats in control of both chambers, the president would keep his veto and broad executive powers, meaning a Democratic sweep would likely constrain the White House without changing its overall direction.
“America has always been able to borrow on the strength of its name,” concludes Nigel Green.
“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.”