All Eyes on the Election

The elections are a little more than a week away, and the markets are intensely focused on the outcome.?While the result of the presidency carries significant weight, the congressional races could be equally — if not more — crucial for market dynamics. Full control of the executive and legislative branches could see larger impacts to economic reforms, shaping areas like tax policy, fiscal spending, and corporate regulation.?

Betting markets are currently assigning a 48% probability to a Republican sweep, suggesting that investors see a strong likelihood of unified GOP control. The runner-up most probable scenario: one where Kamala Harris wins the presidency but lacks congressional support is at a 26% probability. A Trump presidency without full congressional control sits at a 15% likelihood. Finally, the probability of a full Democratic sweep stands at just 12%, showing limited market confidence in the Democrats achieving unified control across branches.?

How do interest rates behave in the days following an election that determines the balance of power in Washington? This chart shows the basis point yield changes over the first 10 days post-election in 2-year and 10-year Treasury yields, as well as the yield curve. The data spans presidential and mid-term election outcomes over the past 32 years (1992–2024).?

On average, in a "Blue Wave/Democratic Sweep" scenario, both 2-year and 10-year yields decrease slightly, while the yield curve flattens by 7 basis points. Under scenarios where the president lacks congressional control, the changes are also more muted.??In contrast, a "Red Wave/Republican Sweep"?sees the largest rise in yields on average.

Outside of the near-term market reaction, the outcome of the election has far-reaching effects on fiscal policy, particularly as the US grapples with a growing deficit and annual Treasury debt interest payments now exceeding $1 trillion. A Trump presidency would introduce further tariffs, which could raise costs across supply chains and contribute to inflation. Renewed tax cuts could stimulate short-term growth but would likely expand the deficit, adding to the debt and amplifying long-term interest expenses. A Harris administration would likely focus on progressive policies, such as increased social spending and climate initiatives, potentially funded by higher taxes on corporations and the wealthy, expanding the deficit.?A scenario in which one party gains total control of the executive and legislative branches would result in the most impactful version of these policies. Fiscal discipline does not seem to be on the ballot this year.??

The emergence of a Republican sweep as the consensus most probable outcome has been reflected in recent market moves, with inflation expectations and the 10-year term premium rising in tandem. This indicates that investors are pricing in a scenario where looser fiscal policies, including potential tax cuts and increased defense spending, could drive higher deficits. The 10-year term premium — a measure of the extra yield investors demand to hold longer-term bonds due to inflation and debt concerns — has moved in lockstep with inflation expectations as markets brace for a fiscal expansion.?

Despite the Federal Reserve’s recent 50-basis-point rate cut in September and expectations for further cuts, long-term bond yields have stayed elevated as deficit concerns take center stage. Normally, rate cuts would put downward pressure on bond yields, but in this environment, expectations of higher government spending and increasing debt levels are keeping yields from falling as much as they might otherwise. This divergence between short-term monetary easing and long-term fiscal risks underscores market apprehension over the potential inflationary pressures of an expanding deficit.??

The interplay between Fed rate cuts, non-recessionary conditions, and a growing deficit could create a unique environment. Inflation expectations, term premiums, and bond yields may remain volatile, as markets balance the Fed's dovish stance with concerns over the long-term fiscal outlook.?We are closely watching these developments – while rate cuts might support short-term growth, they may also fuel inflation risks over the longer term, particularly if fiscal policy further amplifies the deficit.?

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Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.?

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