Prediction markets see a divided government after midterm elections. Here's how you should trade, Citi says.

By Nora Redmond

The odds on Polymarket of a sweep by the Democratic Party in November have risen to 48%, and Citigroup sees a potential rally in bonds

Bettors on Polymarket have priced in a 48% chance of the Democratic Party achieving a midterm sweep in November.

With the U.S. midterm elections less than three months away, investors are turning their attention toward what the political landscape might soon look like, and Citigroup has mapped out how to trade given the possible outcomes.

On Nov. 3, voters will elect members of the House of Representatives and Senate. Bettors on Polymarket now see a 48% chance the Democratic Party will win both houses of Congress, while another 38% expect Democrats to take the majority in the House while Republicans hold on to control of the Senate. (Polymarket has a data partnership with Dow Jones, the publisher of MarketWatch.)

For strategists at Citigroup led by Alex Saunders, if control of the federal government becomes divided between the parties, it's likely to be good news for bond markets. Currently, Republicans control the House of Representatives, the Senate and the White House.

"A loss of the incumbent's trifecta tempers fiscal expectations, leading to a post-election rally in Treasuries," the strategists wrote in a recent note. They added that the yield on the 10-year Treasury note BX:TMUBMUSD10Y generally falls in the event of the loss of such a trifecta - referring to both houses of Congress and the White House - because it becomes more difficult to pass legislation.

Citigroup found that bonds perform especially well when control of the government is split between the parties.

"A divided government leads to lower yields and curve-flattening, but the fiscal deficit, new [Federal Reserve] chair, and more contentious debt-ceiling negotiations are areas of risk in the current environment," the strategists wrote.

Compared with years without a midterm election, stocks, credit and rates all underperform, they said, with investors acting on uncertainty about 50 working days before voting starts. However, they see equities experiencing a relief rally about 30 days before the election, which can often reverse the previous period of volatility into the end of the year.

The strategists found that in the scenario of a divided government, cyclical technology stocks, and to an extent the industrial sector, are prone to outperforming after the election, whereas defensive healthcare stocks and consumer staples are likely to underperform.

-Nora Redmond

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08-17-26 1051ET