The US midterm elections will be difficult to solve the financial difficulties! The amount of debt exceeded 40 trillion US dollars Wall Street is worried that the US bond market may continue to be under pressure

The Zhitong Finance App learned that as the US midterm elections approach, investors are closely watching possible changes in congressional control, but Wall Street generally believes that whether the Republican Party continues to control Congress or the Democratic Party wins a majority of seats, it will be difficult to fundamentally improve America's deteriorating financial situation. As the size of the federal debt exceeds 40 trillion US dollars and the fiscal deficit continues to be high, the US government's demand for borrowing is expected to remain high in the next few years, putting continued pressure on the US debt market.

Since this year, the worsening US fiscal outlook has weakened investors' confidence in US Treasury bonds. As the size of government debt continues to expand and interest expenses continue to rise, the market anticipates that the US Treasury will need to issue more bonds in the future to fill the budget gap. According to the data, the US fiscal deficit for fiscal year 2026 reached about 1.99 trillion US dollars, the highest level in five years, and the deficit ratio of gross domestic product (GDP) is expected to remain around 6%.

Chris Maxey, chief market strategist at Wealthspire, said that the key factors that determine the US fiscal outlook are still the current large deficit size, accumulated debt, and rising interest costs. He believes that even if the Democratic Party wins the midterm elections, it will not necessarily change the overall strategy of the US Treasury to finance the deficit.

The Democratic Party is expected to take back control of the National Assembly, but the fiscal deficit is difficult to narrow significantly

After the Republican Party simultaneously controlled the White House and Congress for two consecutive years, the market predicted that the Democratic Party would be expected to achieve a breakthrough in this midterm election. According to data from prediction markets Kalshi and Polymarket, the Democratic Party's simultaneous majority of seats in both houses of the Senate and the House of Representatives is considered the most likely outcome of Tuesday's election.

According to recent polls, the Democratic Party's approval rating is 11 percentage points ahead of the Republican Party, further strengthening the hope that the Democratic Party will compete for control of the National Assembly. However, some Wall Street agencies are still cautious about the election results. Nomura Securities anticipates that the US may experience a situation where the two parties control both houses of the Senate and the House of Representatives separately. Among them, there is still great uncertainty about the Senate election.

Analysts pointed out that if the Democratic Party controls the Senate and House of Representatives at the same time, it may limit the Trump administration's further tax cuts and curb some discretionary fiscal spending increases.

But that doesn't mean the US fiscal deficit will drop significantly. Expenses for welfare programs such as social security and medical insurance, as well as increasing interest payments on treasury bonds, will continue to drive up the federal government's demand for loans.

George Bory, chief fixed income investment strategist at Allspring Global Investments, said that the US government's spending structure is already quite solidified, and the fiscal deficit is expected to remain at a high level in the next few years. Therefore, even if congressional control changes, it may not be possible to significantly reduce the government's financing needs.

The victory of the Democratic Party or the short-term benefit of US debt and the dollar, and the Republican Party's continued power raised concerns

Although the US fiscal problem is difficult to resolve in the short term, some investors believe that the Democratic Party's advantage in the congressional election may still be beneficial to US Treasury bonds and the US dollar.

Bory pointed out that if the Democratic Party controls Congress, the Trump administration may need to make more compromises on fiscal policy to limit some additional spending items. He said that the Democratic Party's control of Congress may flatten the growing trend of government spending, as the result of a compromise between the two parties may be cutting spending on some projects the president wants to promote. “Overall, government spending growth may begin to slow, which may be a positive factor for the bond market.”

He believes that this change is particularly likely to benefit long-term US Treasury bonds because long-term bond yields are more sensitive to fiscal prospects and government debt sustainability.

Karl Schamotta, chief market strategist at Corpay, said that if the Democratic Party performs strongly in the election, the US dollar may be supported in the short term. He believes that the Democratic Party's acquisition of more seats in Congress may ease investors' concerns about the Trump administration's fiscal, trade, and foreign policy, thereby reducing the risk premium required by the market to hold US assets.

However, not all institutions believe that a victory for the Democratic Party will help control fiscal spending.

Pacific Investment Management (Pimco) pointed out in a recent research report that regardless of which party wins the election, US government spending is likely to continue to increase, and the fiscal deficit may expand further.

Libby Cantrill, head of public policy at Pimco, said that if the Democratic Party takes back control of the Senate, future government spending may even increase further because the Democratic Party will have more influence in debt ceilings and fiscal spending negotiations.

In contrast, some analysts believe that the Republican Party continues to control both the Senate and the House of Representatives at the same time, which is probably the last outcome the US bond market wants to see.

Although the Republican Party has long advocated cutting taxes, reducing the size of government, and controlling fiscal spending, related policies have not always led to lower fiscal deficits or debt levels in actual implementation.

Steve Englander, head of G10 foreign exchange research and North American macro strategy at Standard Chartered Bank, said investors no longer see the Republican Party as a political party that can effectively restrain fiscal spending. He believes that if the Republican Party continues to control both houses of Congress, the price of US Treasury bonds may face a negative reaction.

Debt-ceiling negotiations may become more risky, and the threat of a government shutdown still exists

Compared to the election results themselves, investors are more concerned about future political clashes over debt ceilings and government spending. If there is a split in Congress after the midterm elections, the Democratic Party and the Republican Party are likely to have a more intense game over fiscal spending, tax policies, and debt ceilings. This could not only increase the uncertainty of fiscal negotiations, but also increase the risk of the US government falling into a long-term funding impasse.

Currently, the US Congress has postponed contentious negotiations on the 2027 fiscal year expenditure schedule 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 may once again face the risk of some institutions being shut down.

The US debt ceiling issue is expected to return to the market focus by the end of 2027. Although the US Treasury hits the critical date of debt ceiling restrictions, the so-called “day X,” and is not expected to arrive until the end of 2027, the Democratic Party may use this point as a bargaining chip to demand that the Republican Party make concessions on fiscal spending and tax policies in exchange for the support needed to raise the debt ceiling.

Analysts warned that if the two parties continue to standoff on related issues, it may increase investors' concerns about America's financial management capabilities and further weaken the market's confidence in US Treasury bonds.

The $40 trillion debt will peak financial problems or become the focus of the market in the next two years

Overall, Wall Street believes that the US midterm elections may change the marginal trend of fiscal policy, but it is difficult to fundamentally reverse the trend of continued expansion of government debt.

Whichever party controls Congress, America will continue to face structural challenges such as rising welfare spending, rising interest costs on treasury bonds, and high fiscal deficits. The gap between seats in the National Assembly may be relatively limited in the future, which also means that it will be difficult for either party to push for large-scale fiscal reforms.

Chip Hughey, managing director of fixed income at Truist Wealth, said that no matter which party eventually wins the Senate and House of Representatives, the control advantage may be very weak, so the market should not expect a fundamental shift in US fiscal policy.

He expects that in the next two years, the scale of US government bond issuance and fiscal deficit issues will receive more and more attention. “I think the market's focus on government debt issuance and fiscal deficits will heat up further in the next two years.”

For investors, the midterm elections may affect the trend of US debt and the US dollar in the short term, but what really determines the long-term performance of US assets is still whether the government can control the fiscal deficit, slow down debt growth, and curb the rising interest burden.