How Midterm Elections Shape AI Trade, Rates & Treasury Yields

SPEAKER_1 (0:00)

Now, I do want to bring Sam back into the conversation, though, and turn our attention to the upcoming midterm elections and their potential impact on the markets with Robert Van Batenburg, the market strategist over at Bear Traps Report. Robert, we appreciate you joining us for the nicey floor today. Now, you say that the midterms are becoming a major driver of the bond market, keeping political leanings out of it. Why should bond investors be paying as much attention to the political calendar right now as they are to inflation and the Fed?

Robert Van Batenburg (0:28)

Well, there are a number of issues at play. We have, first of all, gridlock tends to always be positive for bonds. The way it looks right now, Trump is probably going to, the Republicans are going to lose the House as well as the Senate.

After that, you're going to have a period like, which is called gridlock, and every single time the US government has gone to a period of gridlock, whereby one side of the government is controlled by the Republicans and the other side is controlled by the Democrats, bonds tend to rally and the curve tends to steepen. The yield curve, the difference between 2 and the 10, or the difference between the 1 and the 30

There's one aspect of it. The other thing which is quite interesting is that, right around January, the government will probably hit the debt ceiling again, right? So the debt ceiling was set at $41.1 trillion when Trump signed the one big beautiful bill. And we are going to reach that in January. At that point, however, the Republicans do not control Congress anymore, it's going to be the Democrats. And this time around, we believe that the Democrats are going to fight him on it. They're going to fight. They're going to want a pound of flesh in order to raise the debt ceiling. So we could be for six months consecutively in a period whereby there's no new net issuance of debt, which generally tends to be favorable to bonds, right? But we need to get over this hurdle in October. October tends to be the month whereby most net issuance is seasonally at issuance peak. So you see those kind of two aspects kind of trying to battle it out right now in the Treasury market.

SPEAKER_3 (2:14)

And we obviously saw a solid outcome here for the 10-year note auction earlier today. I'm just wondering, we've got oil as well, affordability, data centers right now. Robert, I mean, arguably some of those things are a little bit intertwined. I'm just wondering how likely this is all going to play out in the midterms and then beyond that as far as what happens next.

Robert Van Batenburg (2:37)

Yes, yeah, I think one of the things that investors should focus on is how popular and how successful these DSA candidates are in the midterms. There's about 10 of them running, three of them in the Senate, one of them in Michigan, one of them in Maine and one of them in Minnesota.

Michigan specifically, because Trump won the state in 2016 and 2024, so it's a really purple state, and El-Sayed is running there and he's likely to win. So that would be an incredible accomplishment for him, because he is essentially winning on a socialist platform in a swing state, if you will. Now, the DSA arm of the Democratic Party is not your establishment wing of the Democratic Party. These guys want to overhaul the system, and I know we've heard that before, but they are very doctrinaire. They want to spend $150 trillion over 10 years in income redistribution. They want to raise corporate taxes. They want to institute a wealth tax. They want to raise individual taxes to pay for all that stuff. This could be a major event for the stock market. Now, of course, after the midterms, they cannot implement their agenda, because there are only a few of them in the Senate and a few of them in the House. But if Trump cannot pivot to the center after these midterms, that will pave the way for a DSA-like candidate to win the 2028 general elections, the presidential elections. AOC is already ahead of any other candidate in the Democratic primaries, with 14-50% chance of winning the presidential election in 2028

That's a big thing. You cannot legislate just way out of this. And donors and all that stuff and campaign contributions, it won't work.

So that is a big risk. So we need to see Trump pivot somehow to the center to prevent this from happening.

SPEAKER_1 (4:42)

And interestingly, Robert, the VIX curve isn't showing too much stress around the midterms, even though as we came into the summer, we talked a lot about the midterms and the potential impact. Do you think that investors right now are underpricing the potential for a political shock to rates?