Treasury Rally Gets New Boost as Election Hammers the AI Trade

(Bloomberg) -- Wall Street sees the Treasury market emerging as a winner from the Democratic landslide in the US midterm elections, giving traders another reason to rethink this year's sharp selloff.

The party's sweep of Congress was seized upon by bond bulls after tech stocks tumbled on speculation the political shift will tap the brakes on an artificial-intelligence investment boom that's been fueling economic growth, fanning inflation and pushing up interest rates as companies flood the market with debt to finance it.

A politically divided government will also prevent President Donald Trump from passing any major tax or spending bills, easing some of the market's angst about an annual budget deficit that's hit $2 trillion, equivalent to roughly 6% of the economy.

And oil prices tumbled on speculation the Republican defeat will hasten the end of the Iran war, whose energy shock unleashed the bond market selloff eight months ago.

The response to the elections extended a nearly monthlong Treasury rally that pushed 10-year yields down to nearly 4.8%, more than a half-percentage-point below the early October peak. The market largely held its weekly gain even after Friday's Labor Department report showed that job growth accelerated significantly last month.

"AI's been the biggest contributor to nominal GDP, so any kind of stumble probably helps the bond market," said Scott DiMaggio, head of fixed income at AllianceBernstein. "You have the insurance, that if things wobble, we have a great room to move lower in rates."

The bond market's rapid turnaround echoes the one that erupted at the end of 2023, when yields tumbled sharply after the Federal Reserve wrapped up a cycle of interest-rate hikes.

"The macro narrative has shifted following the blue sweep, which investors are taking to mean policy deadlock and less additional deficit spending."

But the scope of the rally has given some analysts pause because the Fed is currently expected resume raising rates next month as inflation continues to run well above its 2% target.

Moreover, the stock market has been dogged by worries about an AI bubble off and on for years, only to rebound as companies keep plowing money into the technology and investors swoop in to buy the dips.