Bonds priced a Democratic Congress as lower inflation, not weaker growth

Democrats won the US House and the Senate on Tuesday. Oil fell, a market forecast of inflation fell with it, and the yield after inflation rose.

Oil, and the inflation forecast in Treasuries

Brent crude futures, the global benchmark, fell 13.3% on the week, to $98.32 a barrel. The drop was already underway on Monday, before the vote, when Brent fell 7.6%.

On Wednesday, the first full session after Democrats took both chambers, Brent fell 8.7%, to $94.62. Reuters said investors were betting that shift could hasten an end to the US-Israeli war with Iran.

On Thursday, Reuters reported Brent settled up $3.67, at $98.29, after attacks on tankers in the Strait of Hormuz, the passage out of the Persian Gulf. It ended the week at $98.32.

State Street Energy Select Sector SPDR ETF XLE fell 12.0%, a smaller decline than in the futures.

The 10-year Treasury yield fell 8 basis points on the week, to 4.86%. That yield is two rates added together.

One is the 10-year breakeven, the gap between a regular Treasury and a Treasury inflation-protected security, or TIPS. That gap is the forecast of inflation over the next 10 years. It fell 11 basis points, to 2.23%.

The other is the real yield, what remains once that inflation rate is taken out. It rose 3 basis points, to 2.63%. The ordinary yield fell only because the breakeven fell by more than the real yield rose.

The breakeven had already fallen 5 basis points on Monday. Eight of the week's 11 basis points were in by Wednesday's close, the day oil had its sharpest fall after the vote.

BlackRock's iShares TIPS Bond ETF TIP fell 0.4%. The breakeven fell, and the fund still lost money, because the real yield on the bonds it holds rose.

Chip stocks and corporate credit

The S&P 500 rose on Wednesday, the first session after the result, and fell 4.4% on Thursday. Reuters called Thursday the deepest drop since April 2025, and said chipmakers sank on fears of tougher rules for artificial intelligence after Democrats won Congress.

VanEck Semiconductor ETF SMH fell 11.2% on Thursday, rose 3.6% on Friday, and still finished the week down 11.2%. The S&P 500 lost 2.7% on the week.

Through Thursday, the ICE BofA high-yield spread, the extra yield on riskier corporate bonds, was 3.48%, 4 basis points wider than the previous Friday. The investment-grade spread, on safer corporate bonds, was 0.93%, 1 basis point tighter over the same stretch.

With the real yield up and credit barely changed, prices showed less inflation, not weaker growth.

The jobs report and the Bank of England

Employers added 165,000 jobs in October, the Bureau of Labor Statistics said, against a Dow Jones estimate of 59,000. The unemployment rate was 4.1%, from 4.2% in September.

The two-year yield fell 12 basis points on Thursday and rose 5 on Friday, to 4.51%. Friday's rise recovered less than half of Thursday's drop. Reuters said the jobs report sent yields higher, and that markets were pricing about an 80% chance of a quarter-point increase at the Federal Reserve's Dec. 8-9 meeting, up from about 67% on Thursday.

The Bank of England had moved on Thursday, before Friday's jobs report. It raised its policy rate, Bank Rate, by a quarter of a percentage point, to 4%. The UK House of Commons Library said it was the first increase since August 2023.

Its Monetary Policy Committee voted 8 to 1. Catherine L. Mann preferred a half-point increase, to 4.25%.

Thursday's tanker attacks raised the same question Governor Andrew Bailey left open. In the Bank of England's account of the decision, he said:

"Today's increase shouldn't be seen as the first in an inevitable long sequence of hikes. But, unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase."