US fiscal deterioration main headache for investors as midterms loom
TLT•Investors expect the US budget deficit to remain around 6% of GDP, or about $2 trillion this year, regardless of the midterm election outcome. A split Congress could intensify debt ceiling clashes, while a Democratic win may be modestly positive for Treasuries.
1. Deficits persist
Investors see no easy solution to the US fiscal outlook whichever way the midterm elections go. The national debt has topped $40 trillion, and persistent deficits have fueled expectations of heavier debt issuance in the years ahead. The deficit is expected to remain around 6% of gross domestic product, with a $2 trillion budget gap this year.
2. Election scenarios
A Democratic sweep could constrain additional tax cuts and limit increases in discretionary spending, but analysts said rising Social Security and Medicare costs and interest payments would continue to drive borrowing. Some investors said a Democratic Congress could marginally benefit Treasuries if it restrains spending. Pimco said spending would likely increase under either election scenario while the deficit would expand.
3. Debt ceiling risks
Investors warned that a split Congress could make debt ceiling talks more contentious and increase the risk of a prolonged government funding standoff. Congress set December 11 as the deadline to reach a fiscal 2027 funding agreement, while the debt ceiling is unlikely to need raising until late 2027. Investors said the election was unlikely to bring transformational changes or dispel concerns about rising deficits.
