The clearest takeaway from markets following Tuesday’s election has been a broad reduction in risk premiums. Treasury yields moved lower, credit spreads tightened, and equities rallied sharply as financial conditions eased across much of the market. Some degree of political change was already embedded in asset prices as prediction markets had been leaning toward a “blue wave” for several weeks, but the size of the victory was not fully anticipated. As the fog clears from Election Day, markets appear to be repricing two sources of uncertainty at once: the election itself and the risk of further escalation with Iran. The divided government increases the likelihood of a less confrontational approach to the conflict, allowing some of the Iran war premium that had built across rates, volatility, and broader risk assets to begin coming out of the market.
Treasuries rallied roughly 5 to 8 basis points across the curve, producing a relatively parallel shift lower in yields. The curve did not move materially, which is noteworthy given the election outcome. The parallel rally suggests a reduction in the risk premium embedded in rates, with markets assigning somewhat less weight to near-term fiscal expansion while leaving the expected policy path largely intact. Breakevens also moved lower on the day, reinforcing the broader repricing of geopolitical risk. Energy prices fell roughly 8%, with WTI settling just above $88 per barrel, as markets assigned a lower probability to further escalation with Iran. Gasoline futures fell to the lowest level since February.
Agency MBS participated in the rally and outperformed, aided by falling yields and the decline in implied volatility. As implied volatility falls, the cost of the embedded mortgage option declines, improving the relative value of the asset class. ABS remained well bid and CMBS activity was quieter, but the sector benefited from the broader decline in rates and a firmer risk tone.
Corporate credit was similarly firm, although the rally was modest and selective. Some of the strongest buying was concentrated in hyperscaler issuers, healthcare, and telecom, areas where the election has the potential to alter the regulatory or policy backdrop. Recent healthcare issuance also traded well as investors reassessed potential risks around drug pricing and coverage, while telecom tightened alongside a somewhat more constructive interpretation of future spectrum and broadband policy. Away from these pockets, index spreads moved considerably less, suggesting investors were not indiscriminately adding credit risk. Instead, they appeared to be adding exposure where the election potentially changed the underlying fundamental calculus.
These are still early days in the post-election landscape. Political gridlock will likely limit the scope for sweeping policy changes, while the lame-duck session and the months that follow should begin to provide more concrete signals around fiscal, regulatory, and foreign policy. For now, markets have priced in the election result and some reduction in geopolitical risk in the immediate aftermath of the midterm elections.
