There is one bill in Washington that Congress has never voted on.
It came to $1.36 trillion in fiscal 2026, the largest interest tab in U.S. history and $140 billion more than the year before.
As Americans head to the polls Tuesday, Wall Street is anticipating for the most likely election-night outcome: a Democratic-led Congress facing a Republican president.
According to Polymarket, the Democratic Party has a 95% chance of winning the House and a 76% chance of also taking the Senate.
So what would divided government mean for Washington’s spending and its interest bill?
Why Wall Street Is Betting on Gridlock
The consensus answer on Wall Street is gridlock. When Congress and the White House are split, fewer sweeping laws get passed. President Donald Trump could veto Democratic spending plans, while Democrats could block new tax cuts and spending packages. As a result, markets would face fewer spending surprises, and bond investors would demand less extra yield to hold long-dated Treasuries.
That could calm the long end of the Treasury curve for a while. However, it is unlikely to shrink the interest bill.
Gridlock Has a Good Track Record for Bonds
History favors the optimists. On average, 10-year Treasury yields have fallen by about 20 to 25 basis points in the three months after midterm elections, according to Luca Bindelli, head of investment strategy at Lombard Odier.
This time, Bindelli expects a more predictable fiscal path under divided government, which should ease the upward pressure on longer-dated yields.
Diego Barnuevo, market analyst at Ebury, sees a similar first-round effect.
“We think that a Democratic sweep would be neutral to mildly positive for the fiscal outlook. Congress could restrain Trump’s expansionary agenda and, with it, the deficit,” Barnuevo said in emailed comments Monday.
The Interest Bill Runs on Autopilot
The bigger problem is arithmetic, not politics.
Interest is paid under a permanent appropriation. As a result, the cost depends only on how much the government owes and what rate it pays.
Both numbers are moving the wrong way.
Total federal debt stood at $40.3 trillion in early October, up more than $2.4 trillion since the fiscal year began. Meanwhile, the average interest rate on that debt rose to 3.53% at the end of September, from 3.36% a year earlier.
That average is still well below what the market charges today. On Tuesday afternoon, the 10-year yield traded at 4.95%, up 3.8 basis points, while the 30-year yield rose 3.8 basis points to 5.33%. Even the 2-year note, at 4.61%, yields more than a full percentage point above the government’s average cost of debt.
In other words, every maturing bill and note gets refinanced at a higher rate. Each percentage point added to the average rate costs roughly $400 billion a year on $40.3 trillion of debt.
No election result changes that math. For that reason, Wells Fargo Investment Institute expects “the federal budget deficit to continue widening under any election outcome.”
Morgan Stanley reaches the same conclusion. “A change in Congress won’t necessarily bring substantially lower rates,” said Monica Guerra, head of U.S. policy and geopolitical strategy at Morgan Stanley Wealth Management.
Gridlock Could Even Cost More
There is also a second trap.
“Wall Street traditionally welcomes political gridlock because it reduces the likelihood that Congress will pass extremist legislation. But this time could be different,” Ed Yardeni, president of Yardeni Research, said in a note Monday.
Yardeni warned that a split government still has to raise the debt ceiling, and that a prolonged standoff could bring the bond vigilantes back, pushing Treasury yields higher rather than lower. Barnuevo said the ceiling is expected to bind at some point in 2027.
At the same time, rates are rising for reasons Congress does not control. Barnuevo said yields are unlikely to reverse fully as long as the Iran war continues, because the conflict has added an inflationary risk premium across the curve.
The Federal Reserve is not helping either. Fed funds futures price in roughly a 75% chance of a rate hike at the Fed’s December meeting.
Long-dated Treasuries have already paid the price. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) traded at $81.10 Tuesday afternoon, down 7% this year.
Gridlock, then, may stop Washington from adding new spending. However, it cannot stop the interest bill from growing, because that bill was set by debt already issued and by rates the market sets every day.
Photo: VideoFlow on Shutterstock
