Source: Jinshi Data

With less than three months until the U.S. midterm elections, investors are reassessing the potential market impacts of different political outcomes. Citi's strategy team has developed a trading framework for the post-election government structure, believing that if the Republican Party loses its current comprehensive control of Congress and the White House, the bond market may see an opportunity for an upswing.

The U.S. midterm elections will be held on November 3, local time, where voters will elect members of the House of Representatives and the Senate. Currently, the Republican Party controls the House, the Senate, and the White House, forming a "triple control" situation.

Prediction market Polymarket data shows that market participants believe there is a 48% chance that the Democratic Party will win both chambers of Congress; another 38% of participants expect the Democratic Party to win the House, while the Republican Party continues to control the Senate.

However, the data from the prediction market does not equate to official forecasts or judgments about election results. The well-known U.S. technology magazine WIRED reported that election officials in multiple locations are concerned that the public may misunderstand the implications of prediction market odds, viewing them as similar to polling or official forecasts.

A survey conducted by a major election jurisdiction cooperative organization revealed that 75% of respondents could not correctly interpret what the prediction market odds represented, with 35% believing these figures represented already counted ballots or official forecasts released by state governments.

The team led by Citi strategist Alex Saunders believes that if a post-midterm election scenario arises where the Democratic and Republican parties control different power centers, the bond market could benefit.

"Losing the current government's triple control would weaken fiscal expectations and drive U.S. Treasury bonds up after the election," Citi strategists wrote in a recent report.

Citi noted that a divided government usually means increased difficulty in advancing new policies, and the market's expectations for large-scale fiscal spending will decline, leading to lower U.S. Treasury yields. The yield on 10-year U.S. Treasury bonds typically shows a downward trend in similar situations. Bond prices and yields move inversely.

Currently, the market's focus is not just on the election results themselves, but also on how future fiscal policy, Federal Reserve policy, and debt issues may be impacted.

Citi stated, "A divided government usually brings lower yields and a flattening yield curve," but several risk factors remain in the current environment, including a persistently expanding fiscal deficit, the Fed's interest rate outlook, and future contentious debt ceiling negotiations.

Aside from the bond market, Citi believes the midterm elections will also affect the performance of stocks and credit assets. Compared to years without midterm elections, stocks, credit markets, and interest rate markets usually begin to face pressure about 50 trading days before the vote, due to investors adjusting their positions in anticipation of policy uncertainty.

As the voting day approaches, the market may gradually digest political risk. Citi believes that in the 30 trading days before the election, the stock market often experiences a round of relieving rally, potentially reversing the volatility caused by uncertainty and extending into the end of the year.

The rapid expansion of prediction markets is also changing how market participants observe elections. WIRED reported that during the 2024 U.S. presidential election, prediction markets attracted a large amount of capital participation, with a French user earning $80 million by betting on Donald Trump’s victory. As the 2026 midterm elections approach, both Polymarket and Kalshi have launched dedicated election trading sections.

However, the expansion of prediction markets also brings new controversies. Some election officials are concerned that if market odds significantly deviate from the final certified results, it could further intensify public skepticism about election results and amplify market volatility.

From an industry perspective, Citi believes that if a divided government emerges after the elections, cyclical technology stocks and some industrial stocks may benefit, while defensive healthcare stocks and essential consumer goods sectors may lag.

For investors, the key is not just to assess which party wins, but to determine whether the election results change the fiscal policy space, bond supply expectations, and the market's pricing of future interest rate paths. Citi's core strategy is that the dispersal of government power may lower expectations of fiscal expansion, thereby supporting the bond market; at the same time, an improvement in risk appetite may drive gains in some cyclical stocks and tech stocks.