In 18 states, Democrats plan to face off against Republicans in primaries next spring. If these contests remain competitive, not only could they have the chance to win statewide, but all 27 states would have one-on-one primaries for Congress and U.S. Senate. What’s more, if Democrats nationwide are able to take advantage of the opportunity to gain ground on Republicans—whether in 2020 or long-term—they may have the means to close the national gap on a permanent basis.
Investors will sense this over the next several years. Yields on bonds outstanding should rise under Democratic control and, once again, accelerate after 2020. Interest rate spreads, which measure perceived risk, for debt issued by U.S. government agencies between now and 2021 should widen as well, implying less tangible payback for investors. If the Democratic House takes up the “audit” idea, the promise of higher borrowing power is reaped for years. In other words, if the Democrats become members of the majority, the savings from lower borrowing costs over the next few years will greatly outweigh any fiscal stimulus.
How can this potentially beneficial event unfold? During Democratic control of both chambers of Congress in the mid-to-late 1990s, the average Treasury yield fell from 4.25 percent to 3.1 percent. But it was the return from the bust to the recovery that accounted for most of the gain. By contrast, between 1980 and 2013, the average bond yield declined precipitously, from 6.3 percent to 5.9 percent. The yield on the oldest securities, coming of age around 2000, only managed to rise to 6.7 percent over that time frame.
Because Democrats hold so much sway in Washington, it is reasonable to assume that they would take advantage of any fiscal stimulus created through a Republican in the White House. But such potential becomes less likely if President Trump is not willing to go along with higher borrowing costs. If the budget is balanced, as it appears to be, the result would be higher borrowing costs for bonds longer in the future, so less payback for investment.
After Republicans strengthened their positions in Congress in 2006, the average Treasury yield shot up to 3.8 percent, according to Econbrowser. After 2007, the yield dropped to 2.5 percent before it began rising again in the following year. This time around, the average is expected to ease again to 2.1 percent. If Democrats take over the House, this mean-reversion won’t only discourage borrowing for future debt, but might even boost corporate bond yields.
There are, of course, other ways that higher borrowing costs could be harmful to investors. For starters, higher interest rates mean lower corporate profits and eventually diminish the purchasing power of all such earnings. Corporations that are already burdened by interest rates are likely to withdraw their cash into bonds, reduce their dividend payments, or even fire workers, creating a decline in employment. Thus, short-term debt will remain cheaper for consumers and corporations, leaving them less productive than earlier, sound conditions.
There is a long-term horizon to consider, though. Between 2013 and 2018, corporate bond yields fell from 6.8 percent to 5.9 percent. And that’s before the effective tax rate. When one looks more carefully at the tax code, returns on corporate debt are similar to most Treasury securities, according to Kapitall.
Investors should not lose sight of the longer term even if they come to the conclusion that the prospects of the country are so unviable that corporate bonds may be the best possible place to park their money. Below is an article titled How Higher Interest Rates Can Hurt Popular Stocks and Stocks.