Märkt Insight: No matter how the midterms end, bond yields will remain high

US President Donald Trump could get a lesson in the midterm elections in November. But that doesn't mean that US debt will fall, says Andrea Cünnen.

High tariffs, attempted interventions in the independence of the US Federal Reserve, a budget policy that is causing the mountain of US debt to continue to grow - and then the Iran war: US President Donald Trump's policies have cost investors in the financial markets nerves and some money.

Many US citizens are also dissatisfied with their president; his approval ratings are low. Americans are particularly concerned about high inflation. The war against Iran is unpopular. Therefore, the Republicans and thus Trump could receive a lesson in the midterm elections for the US Congress.

If all 435 members of the House of Representatives and 35 of 100 senators are re-elected on November 3rd, the Republicans are currently at least likely to lose the majority in the House of Representatives. That would hardly help the bond markets that are currently so nervous. There is only some hope on one point.

If the Republicans actually lose the majority in the House of Representatives, it would be more difficult for the US government under Trump to implement programs such as further tax cuts. However, cuts in the budget would probably not be possible with the Democrats. This is especially true if their left-wing camp prevails.

Thomas Gitzel, chief economist at VP Bank, therefore says: A sustainable consolidation of public finances is unlikely if the majority in the House of Representatives changes.

This means that the midterm elections should not provide a reason for falling bond yields. After all, the increase in US national debt, along with the increase in energy prices, inflation rates and interest rate expectations, is a key reason why bond yields have risen so significantly. High bond yields, in turn, slow down developments on the stock markets.

In addition, the markets expect the Republicans to lose the majority in the House of Representatives. Gitzel says: “A surprise would move the markets more than a scenario that is already priced into the prices.” Robert Greil, chief strategist at private bank Merck Finck, is also convinced: “The US midterms will not provide a sustainable directional signal for the markets.”

There could be a positive surprise before the US midterm elections because so many Americans oppose the Iran war, says Torsten Slok, chief economist at Apollo Global Management. “The upcoming midterm elections increase the likelihood of a deal in the Middle East.” This would then likely lead to a decline in oil prices, inflation rates and bond yields while supporting stock prices.

However, most market participants do not consider it particularly likely that this will happen. This is shown by a current survey by Deutsche Bank among 460 investors. According to this, 70 percent of those surveyed see the probability that there will now be a quick agreement in the war with Iran at a maximum of 40 percent.