Edward Conard

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  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
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AI Summary. The gap between long- and short-term US government bond yields often widens when one party gains unified control of the presidency and Congress, and yields tend to fall when a party loses control of Congress. The pattern is associated with expectations of a fiscally expansive agenda under unified government.

Tracy Alloway Bloomberg
Date Posted:
Is Database:
Database

The yield curve often steepens when control of the US government shifts from two parties to one, as seen in late 2016 & early 2021. Historical data shows bond yields rise with increased party confidence, as measured by the Michigan survey of consumers.

Does unified party control of government steepen the yield curve?

Core argument: The US yield curve often steepens when one party gains unified control of government, as in late 2016 with Trump and GOP majorities in the Senate and House, and again in early 2021 with a Democratic sweep.

The yield curve often steepens when control of the US government shifts from two parties to one, as seen in late 2016 when President Trump and the GOP controlled both the Senate and House. This pattern recurred in early 2021 with a Democratic sweep, leading to expectations of a fiscal-heavy agenda and higher long-end yields. Historical data shows bond yields rise with increased party confidence, as measured by the Michigan survey of consumers. Conversely, yields tend to fall when a party loses control, such as when the GOP lost Congress in late 2018. This dynamic reflects global investors' response to political risk and fiscal policy changes, suggesting that further yield increases could occur if Democrats pursue aggressive fiscal measures.

Takeaways by Macro Roundup® AI

  1. The US yield curve often steepens when one party gains unified control of government, as in late 2016 with Trump and GOP majorities in the Senate and House, and again in early 2021 with a Democratic sweep.
  2. Bond yields historically rise alongside increased party confidence as measured by the Michigan survey of consumers, and fall when a party loses control, as when the GOP lost Congress in late 2018.
  3. A Democratic sweep raised expectations of a fiscal-heavy agenda and higher long-end yields, with further yield increases possible if Democrats pursue aggressive fiscal measures.

Tracy Alloway, "One Simple (Political) Reason to Explain Bond Yields," Bloomberg, July 21, 2021, https://www.bloomberg.com/news/articles/2021-07-21/one-simple-political-reason-to-explain-bond-yields

One Simple (Political) Reason to Explain Bond Yields

Joe and I have pointed out before that on a longer-term chart the move lower in U.S. Treasury yields doesn’t look so odd.

One Simple Political Reason to Explain Bond Yields: Extended Excerpt Image 1


In fact, it’s the sharp upwards move that starts to look weird. As Joe mentioned before, the move upwards that took place between the U.S. presidential election in November and early in the Spring coincided with a Democratic sweep of Georgia and the flipping of the Senate into Democratic control. That set off a ton of speculation that Democrats would push through a fiscal-heavy agenda — all while the Federal Reserve kept policy relatively easy, which contributed to expectations for higher growth and more inflation and therefore higher yields at the long-end.

The Bear Traps report points out that higher yields as politicians coalesce around an agenda isn’t necessarily a new dynamic. In fact they say the yield curve has a history of steepening as control of the U.S. government shifts from two parties to one party. That’s exactly what happened in late 2016, when President Donald Trump won the presidency with Republicans in control of both the Senate and the House of Representatives.

You can see the dynamic from the (rough) chart below, which shows bond yields moving up when there’s a big spike in Republican or Democrat confidence, according to the Michigan survey of consumers (which I’ve used as a proxy for the parties securing greater control). Of course, the opposite move can also happen when a party loses control — with bond yields heading lower after the GOP lost control of Congress in late 2018.

One Simple Political Reason to Explain Bond Yields: Extended Excerpt Image 2


The suggestion is that higher bond yields could still come into play if Democrats make a concerted push for a fiscal-laden agenda.

“As you move from two-party to one-party control, the curve steepens (higher long-end yields) as global investors digest the political risk of having one party with their hands on the purse strings,” Bear Traps wrote in its report published on Tuesday. “In the summer of 2017, tax cuts were deemed ‘dead’— bond yields crashed, by November/December of that year, the GOP finally delivered of the fiscal juice, and the curve re-steepened.”

Ed Comment: “It’s the FDR effect—each side goes nuts without the other side to rein them in.”

Tracy Alloway looks at US Federal election’s impact on yields, "...on a longer-term chart the move lower in U.S. Treasury yields doesn’t look so odd. In fact, it’s the sharp upwards move that starts to look weird. As Joe mentioned before, the move upwards that took place between the U.S. presidential election in November and early in the Spring coincided with a Democratic sweep of Georgia and the flipping of the Senate into Democratic control. That set off a ton of speculation that Democrats would push through a fiscal-heavy agenda — all while the Federal Reserve kept policy relatively easy, which contributed to expectations for higher growth and more inflation and therefore higher yields at the long-end.... the yield curve has a history of steepening as control of the U.S. government shifts from two parties to one party. That’s exactly what happened in late 2016, when President Donald Trump won the presidency with Republicans in control of both the Senate and the House of Representatives. You can see the dynamic from the (rough) chart below, which shows bond yields moving up when there’s a big spike in Republican or Democrat confidence, according to the Michigan survey of consumers (which I’ve used as a proxy for the parties securing greater control). Of course, the opposite move can also happen when a party loses control — with bond yields heading lower after the GOP lost control of Congress in late 2018...."

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