Markets
(New York)
Almost all of the market articles regarding the results of the midterms have been about stocks, including which sectors might thrive etc. But the real winner might be the bond market. Treasury yields have fallen and spreads between short and longer term bonds have tightened. The reason why is that traders see the forthcoming US budget as more conservative now that Congress is split. In particular, the market thinks there won’t be a big surge in infrastructure spending, and Treasury bond issuance will probably be tighter, both of which have conspired to boost prices.
FINSUM: It is quite odd to think that the election of a Democrat majority to the House would make the market expect more conservative fiscal policy, but the reality is that a divided Congress will probably be less fiscally loose because of gridlock.
(Washington)
Investors can breathe a sigh of relief, but only for a moment, as it looks unlikely that the Fed will hike again in its next meeting this week. The Fed will not be releasing updated projections after this meeting. That said, improvements in the labor market recently make it likely that the central bank will hike rates at its meeting next month. The Fed is supposed to discuss this week all the things you might expect: “the economy, financial markets, and the future path of rates”, according to the WSJ. Fed chairman Powell will not be holding a press conference after the meeting.
FINSUM: This Fed is so hawkish and the economy is rolling so well that even a month’s break from hikes seems like a reprieve. We are a long way from 2013.
(Washington)
This midterm election might have ended up being very consequential for muni bond markets. Some in the muni market feared the possibility of the Republicans maintaining control of both the House and Senate because of how further tax changes could have hurt the finances of municipalities. However, now that Congress is split, the outlook seems more favorable. The reason why is that Congress now looks more likely to restore a tax exemption for a debt refinancing strategy that is often used by local governments.
FINSUM: Just like in other asset classes, having a split Congress looks favorable for munis.
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(New York)
There is some alarming data flowing out of the bond market. First it was the huge amounts of bond fund withdrawals, and now new info—issuance is plunging. US investment grade issuance fell 34% in October (from September). High yield issuance was down 50% from last October. Overall annual issuance fell a great deal on both fronts as well. The numbers reflect slumping demand for bonds as rates and yields rise. Investors also pulled $3.1 bn from investment grade bond funds in the week leading up to November 1st.
FINSUM: This is not surprising given what has been going on in markets this month. Even the annual figures make sense given the rise in rates. The big worry is to what degree this will translate into lower demand for Treasuries at the same time as the deficit (and issuance) is about to surge?
(Washington)
Here is an eye-opener for investors: one of the biggest market reactions to the midterms is likely to be in munis. In particular, yields on munis are expected to fall is the Democrats take the House, which would result in a split Congress. The reason why is that such an outcome would likely limit the further possible damage that could be wrought by Republican tax proposals. However, since the market is anticipating this outcome, if Republicans do maintain their hold on the House and Senate, then yields could rise sharply. The call on the moves comes from Barclays.
FINSUM: The most likely outcome right now seems to be a blue House and a Red Senate, which would mean smooth sailing and likely gains for munis.
(New York)
One of the big worries in the Treasury market is that foreign demand is waning for Treasury bonds at the same time as supply is surging. This is leading many to stress that US government bond prices could be in for a big fall. However, Bloomberg says that won’t happen. The logic just isn’t there, and neither is the data to back it. Inflation and rates are rising, and so is the Dollar, making the bonds more attractive to hold. Further, US yields and credit-worthiness are looking increasingly positive given the bond market turmoil in Europe.
FINSUM: Because the Dollar is still the dominant world currency, there is a lot of built-in demand for Treasuries. And given the state of US yields versus the rest of the developed world, we don’t think foreign demand is going to shrink.