Can Elections Influence Interest Rates?

Can Elections Influence Interest Rates?

The bond market and interest rates have an inverse relationship, so knowing what's going on with bonds can help us anticipate what will happen with interest rates. This is particularly interesting during times of elections.

While the bond market can experience considerable volatility due to election outcomes, the extent of that influence may depend on the election. For example, the market's reaction to the 2020 presidential election was significantly less than that of the 2016 election. 

2018's midterms had no noticeable impact at all. That's not to say that 2018 experienced no movement. Other mitigating factors, such as Brexit news, CPI data, and global economic shift, caused a stir in the market at the time. But the transition was minuscule when zoomed out, and overall trends are gauged.

The same can be said about 2020's election. 

However, 2016's election had a noteworthy shift. But one must remain mindful that correlation does not always mean causation. 

For example, say there's a strong consensus about how the market will react to today's election results. In that case, that sentiment itself can be enough to influence movement --regardless of whether the elections themselves had any influence. 

That's what some are saying that they expect to see this week, as the average market participant tends to believe that a GOP sweep means more robust levels in both stocks and bonds. All we can do is wait for Thursday's CPI report.


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