The Midterms can change spending, but not America’s fiscal path

Economic growth received a boost from government spending, which added roughly 80 basis points to growth in the first half of 2026 and helped cushion the economy during the Middle East conflict. But that support is expected to reverse, with fiscal policy projected to become a roughly 70 basis point drag on growth through 2027. ³ That is one less tailwind to the speed of expansion in the U.S. economy at a time when borrowing needs continue to rise.

Investors are increasingly demanding additional compensation to hold long-dated Treasury bonds, contributing to the rising term premium in the bond market alongside increased supply. The U.S. Treasury is on track to issue over $30 trillion in government debt across bills, notes and bonds to finance higher federal spending, service higher interest costs and refinance existing debt in 2026. Alongside higher issuance from the companies financing the AI build-out, this is helping push bond yields to multi-decade highs.

However, it’s important to note that the most important measure of issuance is not gross or total issuance, but net issuance. In other words, how much new issuance is coming to market. By this measure, it’s clear that issuance is rising, but remains significantly below the highs of 2020. Note: During the pandemic, fiscal policy and 0% interest rates helped keep the economy afloat while physical movement was shut down. Consequently, the fiscal deficit expanded. The fact that it remains at historically elevated levels six years later is notable.

The makeup of that issuance is crucial too. Given the volume of T-bills relative to notes and bonds, shorter maturities create more volatility and further increase the need for additional funding. If Treasury issuance grows faster than demand from households, pension funds, banks and foreign buyers, investors may continue to demand higher yields to absorb the additional supply.

A Divided Congress

Midterm elections are often seen as a referendum on the incumbent administration. The political pendulum tends to swing away from the party in power, with majority control changing hands in at least one chamber of Congress. That has been the result in three of the past four midterm elections.

A mixed Congress with one chamber controlled by Democrats and the other controlled by Republicans can limit new legislation, leaving little room for policy changes. Tax and spending policy can operate on autopilot, with existing laws, entitlement formulas and interest costs doing the heavy lifting. Investors tend to greet this kind of gridlock scenario with relief as it eliminates policy uncertainty and adds near-term visibility for the business operating environment.

The initial market reaction can create a bid for bonds as investors seek safety in what is meant to be the world’s safest asset, but a pattern of prolonged fiscal brinkmanship can increase market volatility.

More spending, more problems

In some cases, gridlock doesn't reduce spending. It amplifies it. In the face of true gridlock, lawmakers can be encouraged to fund priorities from both parties. Some of the biggest budget deals and spending packages of the 21st century thus far were bipartisan, but ultimately led to greater funding needs.⁴ Although it has limited near-term effect, it can amplify debt burden worries in the long term—something already reflected in the growing term premium.

Another risk sits in the budget creation process itself. Take the 2025 funding lapse, which lasted 43 days and became the longest government shutdown in modern U.S. history. Followed by a series of rolling partial closures, it serves as a warning of delayed appropriations and the more frequent use of continuing resolutions.⁵ It keeps the government open but extends the overhang of fiscal uncertainty and raises the stakes when the debt ceiling needs to be revisited

A Democratic sweep

If Democrats win the majority of seats in both the House and Senate, Congress would have greater leverage over appropriations, taxes and oversight—but not a free hand. A Republican White House could still veto legislation, and most bills in the Senate would need bipartisan support as any majority is expected to be a slim one.

Amid a slew of spending priorities, one likely policy emphasis could be on affordability measures and protecting social safety nets like social security, Medicare, Medicaid spending on long-term care and expanding access to healthcare through legislation like Affordable Care Act subsidies.

It’s no secret that the U.S. population is aging. The 65 and over age group is expected to grow from 18% to 25% of the total population over the next 30 years.⁶ Fewer workers are supporting more retirees, which makes demographics a key part of which spending promises can and should be sustained.

With a growing number of elderly citizens who rely on social programs, the cost naturally grows over time. That can be a long-term concern for the bond market as responsible financing becomes a bigger tenet of the term premium. As investors focus on whether new spending is paired with durable revenue, an expansion financed primarily through borrowing could put upward pressure on issuance and potentially on longer-term yields.

A Republican sweep

If Republicans retain both chambers of Congress, they will likely keep pursuing the White House’s policy agenda. A renewed Republican majority could pursue additional tax relief, continued deregulation and an increase in defense and national-security spending. Note: the White House has already proposed a record $1.5 trillion in defense spending for 2027.

The Republican party has long been associated with prioritizing fiscal prudence and cutting federal spending, but the experience of the past decade suggests that a unified government can make major fiscal legislation easier to pass, but not necessarily make a deficit reduction easier to deliver—especially when defense, technology and energy are party priorities.

Domestic investment in onshore manufacturing, energy security and the AI build-out in a more deglobalized world have become key tenets of the Republican—and in some cases bipartisan—agenda. It has spurred some economic growth, but still far outpaces tax and other government revenues.

That investment is likely to increase the cost of goods and labor. Those rising prices feed into a structurally higher inflation environment, which then fuels higher bond yields. For investors, that means the cost of capital can increase as these spending priorities amplify the need for both more resources and eventually more Treasury borrowing.

Different winners, same debt challenge

The three outcomes would create distinctly different sector winners, but the bond-market signal is less partisan. Investors are already charging borrowers more for duration. The Federal Reserve Bank of San Francisco estimated the 10-year Treasury term premium at 1.40 percentage points as recently as the end of September, up from 1.14 percentage points one year earlier.⁷

The 2026 midterms will determine the level of spending that gets through Congress, but with the nation already facing large deficits, rising mandatory spending and rapidly growing interest costs, midterm elections are unlikely to change the United States’ debt trajectory. While reversing the debt path would require tough choices on taxes and social programs—something neither party has made central to its campaign—a new Congressional makeup can change the composition of policy at the margin.

For investors, the most important post-election signals may be the size of each party’s majority, the first budget resolution and the willingness of lawmakers to attach offsets to new priorities. Those details will help determine whether the next Congress delivers a change in the composition of spending, a meaningful increase in borrowing or a period of gridlock without necessarily improving the long-term arithmetic.