Source: Jin10 Data
With less than three months to go before the US midterm elections, investors are reassessing the potential market impacts of different political outcomes. Citi Group's strategy team has developed a trading framework for the post-election government landscape, suggesting that the bond market could see a rally if Republicans lose their current unified control of Congress and the White House.
The US midterm elections will be held on November 3rd local time, with voters electing members for the House of Representatives and the Senate. Currently, Republicans control the House, Senate, and the White House, forming a "trifecta" of control.
Data from the prediction market Polymarket shows that market participants give a 48% probability of Democrats winning both chambers of Congress; another 38% of participants expect Democrats to take the House, while Republicans retain control of the Senate.
However, prediction market data is not equivalent to official forecasts or judgments of election results. American tech magazine WIRED reported that election officials in various regions are concerned that the public might misinterpret prediction market odds, viewing them as results similar to polls or official forecasts.
A survey conducted by a cooperative of large election jurisdictions showed that 75% of respondents could not correctly understand what prediction market odds represent, with 35% believing the numbers represent already counted votes or official forecasts issued by state governments.
The team led by Citi strategist Alex Saunders believes that if the midterm elections result in Democrats and Republicans controlling different centers of power, the bond market could benefit.
"Losing the incumbent government's trifecta would weaken fiscal expectations and drive US Treasuries higher post-election," Citi strategists wrote in a recent report.
Citi notes that divided government typically implies greater difficulty in advancing new policies, lowering market expectations for large-scale fiscal spending, hence US Treasury yields tend to trend lower. The 10-year US Treasury yield often shows a declining trend under similar circumstances. Bond prices move inversely to yields.
The market is currently focused not only on the election results themselves but also on the potential impacts on future fiscal policy, Fed policy, and debt issues.
Citi states, "Divided government typically leads to lower yields and a flattening yield curve," but multiple risk factors persist in the current environment, including a persistently widening fiscal deficit, the Federal Reserve's interest rate outlook, and potentially more contentious future debt ceiling negotiations.
Besides the bond market, Citi believes the midterm elections will also affect stock and credit asset performance. Compared to years without midterm elections, equities, credit markets, and interest rate markets typically begin to come under pressure about 50 trading days before the vote, as investors adjust positions early to address policy uncertainty.
As Election Day approaches, markets may gradually digest political risks. Citi believes that around 30 trading days before the election, the stock market often experiences a relief rally, potentially reversing previous volatility caused by uncertainty and continuing through year-end.
The rapid expansion of prediction markets is also changing how market participants observe elections. WIRED reported that during the 2024 US presidential election, prediction markets attracted significant capital participation, with a French user reportedly gaining $80 million by betting on Donald Trump's win. As the 2026 midterm elections approach, both Polymarket and Kalshi have launched dedicated election trading sections.
However, the growth of prediction markets has also brought new controversies. Some election officials worry that if market odds deviate significantly from the final certified results, it could further fuel public skepticism about election outcomes and amplify market volatility.
From a sector perspective, Citi believes that if a divided government emerges post-election, cyclical technology stocks and some industrial stocks could be beneficiaries, while defensive healthcare and consumer staples sectors might underperform relatively.
For investors, the key is not just judging which party wins, but assessing whether the election results alter the space for fiscal policy, expectations for Treasury supply, and the market's pricing of the future interest rate path. The core of Citi's strategy is that a fragmented government may reduce expectations for fiscal expansion, thereby supporting the bond market; meanwhile, an improvement in risk appetite could drive a rebound in some cyclical and technology stocks.
