Key facts
- The Treasury said it expected to keep note and bond auction sizes steady, based on projected financing needs.
- Analysts said divided government may restrain future borrowing but will not necessarily bring down elevated bond yields.
- Congress must reach a funding agreement by December 11 to fund the federal government, analysts noted.
- BMO's Vail Hartman said markets could face a protracted debt ceiling standoff in 2027 if Congress does not act before year-end.
- Moody's said mandatory spending, demographic pressures and interest costs keep the fiscal trajectory unchanged.
- BlackRock Investment Institute said divided government raises the risk of funding standoffs and shutdowns.
The US Treasury Department's quarterly refunding statement, released on November 4, was described by market participants as largely neutral on the government's borrowing outlook. The Treasury said that based on its projected financing needs it expected to keep note and bond auction sizes steady.
The statement followed the November 3 midterm elections, in which Democrats won control of the Senate and House of Representatives from President Donald Trump's Republican Party. Analysts said divided government may restrain future Treasury borrowing and prevent fresh deficit blowouts, though it will not necessarily bring down elevated bond yields.
Investors are focused on the risk of standoffs over the government's borrowing limit, with the potential for political brinkmanship to unsettle markets, according to a Reuters report. The government is unlikely to hit the debt ceiling until late next year, but Democrats could use the so-called X-date in budget or other negotiations with Republicans, the report said.
"The Democrats are going to have some decent bargaining chips as it relates to the debt ceiling," said Michael Reynolds, vice president of investment strategy at Glenmede. "A default scenario from our view is very unlikely," he said, adding that the further the brinkmanship path goes, the more worried markets will be about that eventuality.
Analysts are zeroing in on December 11, the date by which Congress needs to reach agreement to fund the federal government, Reuters reported. Some said Republicans could use that deadline to raise the debt ceiling before the Democratic-controlled Congress takes office in early January, but others were skeptical. "The administration would probably like to get the debt ceiling raised in a lame-duck session, but I doubt that we'll see that now, given the scale of the Democrat victory," said Dustin Reid, chief fixed-income strategist at Mackenzie Financial.
Vail Hartman, US rates strategist at BMO, said in a note that if Congress fails to address the debt ceiling before year-end, "Financial markets could face a protracted debt ceiling standoff in 2027, raising the risk of sovereign debt downgrades, price distortions around the projected X-date, and increased volatility in cash and repo markets should Treasury draw down its General Account to deploy extraordinary measures."
UBS analysts said in a note that Democrats could seek changes to Medicaid, housing incentives and other domestic priorities in exchange for their votes, with an agreement that might be stimulative and leave deficits wider than Congressional Budget Office baseline estimates. Shawn Snyder, economic strategist at Potomac Fund Management, said divided government will make major fiscal legislation more difficult, particularly spending initiatives lacking bipartisan support.
Moody's said in a report following the election that the broader US fiscal trajectory was unlikely to change materially because the principal drivers of rising debt, including mandatory spending, demographic pressures and interest costs, remained in place. BlackRock Investment Institute agreed that political gridlock was unlikely to alter the fiscal trajectory but said divided government raises the risk of funding standoffs and government shutdowns.