After the Democrats swept the US midterm elections, a divided government may help restrain future Treasury borrowing and prevent fresh deficit blowouts, though it will not necessarily bring down elevated bond yields, analysts say.

The US Treasury Department unveiled its quarterly refunding statement on Wednesday, with market participants describing the overall borrowing outlook as largely neutral.

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, in line with the May and August quarterly refunding rounds. Analysts said that stance was likely to persist.

A divided government “sharply limits” the scope for future unfunded fiscal packages, wrote a team led by Dario Messi, head of fixed-income research at Swiss private bank Julius Baer, in a research note on Wednesday.

“This [midterm election] outcome does not resolve US fiscal challenges, but it reduces the risk of another discretionary deterioration in the deficit over the next two years,” the team said.

So long as the Iran war drags on and inflation expectations remain elevated, this should keep yields highMatthew Ryan, Ebury Blerina Uruci, chief US economist at asset management firm T. Rowe Price, said the estimated deficit would remain elevated at around 5.7 per cent of gross domestic product in 2027.

While Treasury supply and fiscal policy were projected to remain broadly constrained, other market factors could continue pushing yields higher, analysts warned.

Long-dated US Treasury yields have trended higher over the past two years, hitting a multi-year high in October amid sticky inflation and artificial intelligence-fuelled investment demand. The 10-year US Treasury note, the benchmark for mortgage rates, climbed to about 5.36 per cent in early October.

“Treasury yields look set to stay elevated regardless,” said Matthew Ryan, head of market strategy at foreign exchange specialist Ebury. He argued that yields were being driven more by higher energy prices than by fiscal policy.

“So long as the Iran war drags on and inflation expectations remain elevated, this should keep yields high,” Ryan said. “Even if a Democratic-controlled Congress could increase pressure on [US President Donald] Trump to end the war, it will not dictate US military or foreign policy.”Besides stubborn inflation, analysts are also closely watching the financing demands created by the AI investment cycle.

The 30-year Treasury yield fell to around 5.23 per cent on Wednesday, retreating from an early October peak of 5.732 per cent. The decline came amid a tech stock sell-off and increased safe-haven demand.

“Looking ahead, another implication concerns the AI investment cycle,” Messi’s team said. “Democratic gains suggest a more pronounced anti-AI mandate, as does overwhelming opposition to data centres across dozens of specific local ballot measures.”The analysts added that the debate was likely to intensify in the months and years ahead.

“Any slowdown in capex expectations would necessarily lead to a lower growth outlook and more modest issuance needs,” they said.