US Borrowing Outlook Steadies After Midterms, But Treasury Yields Face Tests

Analysts say the US borrowing outlook has become more stable after Democrats swept the US midterm elections, but the change may not be enough to pull elevated Treasury yields lower. Democratic gains reduce the risk of fresh deficit blowouts, while inflation, energy prices and AI spending are expected by analysts to keep yields elevated.

Treasury keeps auction sizes unchanged

The US Treasury Department unveiled its quarterly refunding statement on Wednesday. Market participants described the overall borrowing outlook as largely neutral after reviewing the statement.

Based on its projected financing needs, the Treasury said it expected to keep note and bond auction sizes unchanged “for the next several quarters”. It maintained the size of its 30-year bond auction at US$25 billion. That matched the size in the May and August quarterly refunding rounds.

Divided government limits borrowing risk

Analysts said a divided government following the midterm elections may help restrain future Treasury borrowing. They also said it may prevent fresh deficit blowouts, giving the borrowing outlook a steadier footing.

The political shift will not necessarily bring down elevated bond yields. Instead, analysts identified inflation, energy prices and AI spending as pressures that could keep yields elevated. A more restrained borrowing outlook, therefore, may coexist with continued elevated Treasury yields.

Source: South China Morning Post