Bond investors sit out ‘most consequential’ US midterm elections in years

Investors are bracing for the “most consequential” US midterm elections in years, with results expected to set the direction of everything from statewide AI policies to federal spending.

Big fund managers told the FT they were shifting to the sidelines ahead of Tuesday’s vote, a pivot that comes after fixed income investors piled into the market in recent weeks to lock in attractive returns from soaring bond yields.

“It’s a pause moment,” said Greg Peters, co-chief investment officer at PGIM Credit, after “a big move” in US Treasuries. “This is the most consequential midterm election cycle that we’ve seen in a very, very long time,” he added.

The race will play a defining role in the trajectory of crucial issues for Wall Street, including AI data centres and US public spending at a time when the national debt is at a record-high $40tn.

The midterms come as the AI industry has faced intensifying questions about its gargantuan borrowing plans, contributing to the tech-focused Nasdaq 100 equity index falling into correction territory on Friday.

Major hyperscalers, including Alphabet, Amazon and Meta, reported weaker than expected third-quarter earnings this week and detailed the enormous sums they still need to raise to finance the AI build-out.

Despite having been bullish, Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management, said his team was pressing pause while awaiting the midterms results as well as upcoming economic data releases.

Khanduja pointed to a US Treasury refunding announcement due on Wednesday — a day after the midterms — and a US inflation reading on November 10.

“We are tactically holding off to get these results,” he said. “[We’re] resisting the urge of having one binary outcome of the midterms drive directly, in a vacuum, what it would mean for rates and curves.”

Peters said that if the interest rate expectations priced in by markets were to be believed, he did not see “scope for the belly of the 10-year to really continue to perform”.

“I think the scope for further gains from a price appreciation standpoint is limited at this point,” he added.

Khanduja said a divided Congress was the base case for his team and “overall should be bullish for bonds”, helped by the prospect of “greater fiscal restraint”.

Even though Democrats are widely expected to win the House and slightly favoured to win the Senate, investors cautioned that US President Donald Trump’s vast executive powers and presidential veto are likely to limit congressional authority.

That complicated outlook means the gubernatorial races taking place in 36 states could have the biggest impact on markets.

“I think the gubernatorial races matter a lot in this cycle. The outcomes in these races could have a meaningful impact for the AI build-out and capital spend,” said Jason Granet, chief investment officer at BNY. “That’s particularly important in states where there are a lot of data centre hubs and infrastructure,” he added.

PGIM’s Peters agreed. “The senators are important too, but I think the governors are the ones with boots on the ground . . . It will be really interesting to see how down-ballot, or not, this potential Democratic success is,” he said.

Two of the biggest hubs for data centres — Texas and Ohio — face tight gubernatorial races, with victories for Democrats expected to stunt AI growth.

With the significance of a broad Democratic sweep being “nuanced” due to Trump’s remaining powers, Khanduja said “a Republican sweep . . . might be the most bearish”.

“I wouldn’t say that is at all priced in the markets,” Khanduja added. “So you could see a little bit more of a reaction from that.”

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For Kristina Hooper, Man Group’s chief market strategist, a disputed election would be “the biggest thing that markets would react to”.

Still, some argued that investors were preoccupied with other leading issues of the day.

Daniel Gamba, co-president and chief commercial officer at $1.8tn-in-assets Franklin Templeton, said that at a recent conference in Asia attended by asset managers “not a single bit of the conversation was about the midterm election”.

Recent conversations have centred on AI, the Federal Reserve’s trajectory and geopolitics, he said, among other topics.

Pointing to a recent Franklin Templeton Institute equities study, Gamba said that “based on experience, no one’s expecting any drastic change to markets” from Tuesday’s vote.

Clients are concerned about how portfolios are constructed, he added, but this is “more related to AI, data centres, concentration of the indices” and “the centre of the discussion is diversification”.