The deteriorating fiscal outlook for the U.S. economy has been a persistent worry for investors, who see no quick fix regardless the outcome of the midterm elections.
Concerns over the fiscal outlook have weakened confidence in U.S. Treasuries this year, as the national debt tops $40 trillion and persistent deficits fuel expectations of heavier debt issuance in the years ahead.
If Republicans retain control, investors expect more of the same pressures on the public purse. If Democrats win control of Congress, political gridlock may make it harder to agree on new spending, yet meaningful fiscal consolidation is unlikely, investors said.
The deficit is expected to remain around 6% of gross domestic product (GDP), with a $2 trillion budget gap this year.
"It really does come back to where the current deficit is, the amount of debt outstanding, and the rising interest costs associated with it," said Chris Maxey, chief market strategist at Wealthspire, who said a Democratic win will not necessarily change the Treasury's strategy to finance the deficit.
After two years of Republicans controlling Congress and the presidency, Democratic majorities in both the Senate and House of Representatives are the most likely outcome on Tuesday, according to prediction markets Kalshi and Polymarket.
A recent Reuters poll showed an 11-point Democratic advantage, bolstering Democratic hopes of seizing control of either chamber.
Some banks, such as Nomura, see a split Congress emerging, with Senate races too close to call.
While a Democratic sweep could constrain additional tax cuts and limit increases in discretionary spending, analysts said that rising entitlement costs such as Social Security and Medicare, as well as interest payments, would continue to drive borrowing, leaving little scope to materially reduce the deficit.
George Bory, chief investment strategist for fixed income at Allspring Global Investments, said government spending is "pretty well entrenched," and with deficits likely to stay large over the next few years, a change in congressional control may not significantly reduce borrowing needs.
Investors cautioned that persistent budget shortfalls and growing interest expenses are expected to keep Treasury borrowing needs elevated for years. Some think Democrats prevailing in the U.S. House or Senate could be marginally positive long-term for Treasuries and the dollar, if they manage to restrain spending.
"The trajectory of spending could flatten under a Democratic Congress because it forces some compromise and the compromise might be for less spending in some of the pet projects of the president," said Bory.
"On balance, the rate of change in spending could start to decelerate and that could be positive for the bond market," especially on the long end of the curve, which is sensitive to the fiscal outlook.
Democratic strength could lift the dollar in the short term, as it would ease concerns over President Donald Trump's fiscal, trade and foreign policies, said Karl Schamotta, chief market strategist at Corpay. That would reduce the risk premium investors demand to hold U.S. assets, he said.
Bond manager Pimco said in a recent research note that spending would likely increase under both election scenarios, while the deficit would expand.
"We could see even more spending, especially if the Senate flips, as Democrats will have more power in the upcoming debt ceiling and spending negotiations," wrote Libby Cantrill, Pimco's head of public policy.
The worst outcome for the bond market could be the status quo, some say. Republicans have historically aligned themselves with fiscal conservatism, promoting lower taxes, smaller government and spending restraint. In practice, however, those policies have not always produced smaller budget deficits or lower national debt.
Steve Englander, head of G10 FX research and North America macro strategy at Standard Chartered, said investors no longer view Republicans as the party of fiscal restraint, and if they keep control of both chambers, bond prices would respond negatively.
A greater threat for the market is clashes over the debt ceiling. A split Congress could make talks over this recurring issue more contentious as Democrats and Republicans fight over spending and fiscal priorities, increasing the risk of a prolonged government funding standoff.
Congress has postponed a contentious debate over fiscal 2027 spending until after the midterms, setting up a Dec. 11 deadline to reach a funding agreement.
While the date when the debt ceiling needs to be raised is unlikely to occur until late 2027, Democrats could use the so-called X-date as leverage in negotiations with Republicans over spending and tax policy, pressing for concessions in exchange for votes to address the borrowing limit.
Ultimately, investors said the election may marginally affect the budget outlook, but it is unlikely to dispel concerns about rising deficits that have spilled across asset classes.
"Whoever wins in the House and Senate, the margin is likely to be relatively slim, so we wouldn't expect any kind of transformational changes," said Chip Hughey, managing director of fixed income at Truist Wealth in Richmond, Virginia.
"I would suspect that over the course of the next two years, the focus and work are going to intensify around government debt issuance and deficits."
