Why Divided Government May Not Ease Debt Risk

Key Takeaways

• Speaking before the 2026 midterm vote, Casey argues that divided government would not necessarily produce fiscal restraint.
• An annual budget deficit and the stock of outstanding debt are different measures; new borrowing and refinancing both matter.
• Higher market yields can reduce the price of existing fixed-rate bonds without changing their contractual coupon.
• Stock valuations can also come under pressure when investors demand a higher return on future cash flows.
• Casey discusses AI regulation and taxes as possible policy risks, rather than enacted changes.
• His election and interest-rate outlooks are guest forecasts, not established outcomes.

Key Moments

00:17 The pre-election outlook. Casey discusses the vote and the uncertainty around forecasts and prediction markets.

03:28 Why gridlock may not mean fiscal restraint. The conversation turns to spending, congressional control and future political incentives.

05:55 Deficits and Treasury yields. Maggie asks how continued borrowing could affect the bond market.

08:22 Affordability and political pressure. Casey discusses household expenses and the issues he expects to shape policy debates.

10:28 Industry oversight and regulation. The discussion covers utilities, technology executives and government involvement in business.

12:17 Interest rates and stock valuations. Casey explains the pressure higher discount rates could place on future earnings.

13:52 Taxes and shifting party assumptions. Maggie asks how changing political priorities affect investment planning.

16:43 AI and debt as investment themes. Casey discusses AI infrastructure, fiscal risk and the possible effects of regulation.

19:38 Exploring Chinese technology. He says the firm is still investigating the idea and acknowledges its complexity.

22:20 What clients are asking. The interview closes on interest rates, prices, AI valuations and diversification.

A quieter legislative agenda can sound reassuring for investors. It doesn't mean the government's borrowing bill gets smaller. Spending commitments and maturing debt still need to be financed, even when political leaders struggle to agree on new laws.

That is the concern Chris Casey, a Wealthion advisor, raises in his pre-election conversation with Maggie Lake. He argues that divided government could leave the fiscal problem unresolved. His comments about the 2026 midterm outcome are forecasts made before the vote, not reported election results. ^1 2

7% Treasury Yields by 2028? The Midterm Warning

Maggie Lake speaks with Chris Casey about the midterm elections, government borrowing, Treasury yields and stock valuations. They also discuss taxes, artificial intelligence (AI) and possible policy changes.

The starting point is already substantial. In its October 8, 2026 preliminary estimate, the Congressional Budget Office (CBO) put the fiscal 2026 federal deficit at about $2 trillion. ³ That measures how much spending exceeded revenue over the year. The government also needs to refinance debt as it matures, so its financing needs extend beyond the annual deficit alone. ⁴

Why gridlock does not automatically shrink the deficit

Casey's argument is that political compromise can involve giving different groups more of what they want, rather than agreeing on spending restraint. He sees the possibility of larger deficits, or continued deficits under existing policies. That is a scenario about political incentives, not a rule that divided governments always spend more. ¹

There is a distinction between passing fewer laws and changing the budget's underlying direction. CBO's fiscal 2026 estimate showed spending rising faster than receipts, with higher outlays for interest, major benefit programs and other categories. A change in congressional control would not, by itself, change those recorded results or establish a different future path. ³

Casey therefore places more weight on the borrowing requirement than on the reassuring idea of gridlock. For his argument to play out in markets, however, investors would have to demand more compensation for supplying that funding. A large deficit does not mechanically determine the yield at the next Treasury auction.

How borrowing pressure can reach the bond market

A long-term Treasury yield reflects more than the Federal Reserve's next interest-rate decision. It includes expectations for short-term rates over the life of the bond and a term premium, the extra compensation investors require for holding longer-term interest-rate risk. Federal Reserve research on the second half of 2023 linked the rise in yields to a combination of greater Treasury issuance, shrinking Fed securities holdings and economic uncertainty. That was an analysis of that episode, rather than proof that supply alone controls yields. ⁵

Casey expects fiscal concerns to push longer-term rates higher. The qualification is that other forces can work in the opposite direction. The same Fed study found that changing expectations played a larger role as yields later declined amid softer economic data. Demand for bonds and expectations for growth and inflation can change the outcome. ^1 5

For an existing bondholder, the immediate issue is the market price. When comparable market yields rise, a fixed-rate bond's price generally falls. Its contractual coupon does not rise to match the new market rate. The Securities and Exchange Commission (SEC) explains that longer maturities generally bring greater sensitivity to interest-rate changes. ⁶

The government's interest bill adjusts on a different timetable. Higher financing costs affect new borrowing and debt that is refinanced; they do not reset every outstanding fixed-rate coupon at once. ⁴ CBO's fiscal 2026 analysis attributed higher net interest outlays partly to a larger debt stock and higher long-term rates, while lower short-term rates provided a partial offset. ³

Why higher yields can affect stock valuations

The connection to stocks runs through what investors are willing to pay today for money a business may earn later. If the return they demand rises while expected cash flows stay unchanged, the present value of those future payments falls. San Francisco Fed research describes stock valuation in terms of expected cash flows and a discount rate that includes both a risk-free return and compensation for risk. ⁷

Casey calls the resulting pressure on earnings multiples multiple compression. He is particularly concerned about businesses whose valuations depend heavily on profits far in the future. That does not mean every stock must fall when rates rise. Stronger expected earnings or a change in the risk premium can offset part of the discount-rate effect. ^1 7

What congressional control could change for AI

The conversation also follows political uncertainty into AI, electricity and industry oversight. Casey sees possible pressure on utilities and technology companies, and he worries that affordability concerns could encourage more intervention. These are his political risk scenarios, rather than announcements of price caps or new ownership rules. ¹

The route from a political proposal to a new law still matters. A bill must pass both chambers in the same form before it goes to the president; a veto can be overridden under the constitutional process. Presidential nominations are a separate channel: the Constitution assigns advice and consent to the Senate. Winning the House alone does not confer that confirmation power. ^8 9

Casey links AI's growth potential with his concerns about fiscal policy, but those themes can produce different investment outcomes. The useful distinction in his argument is between a technology becoming more important and every business associated with it earning an attractive return. Regulation, financing costs and the price already paid for expected profits all influence that result. ^1 7

Divided government may slow some policy changes without resolving a large borrowing requirement. Casey's warning follows that requirement into bond yields and then into stock valuations. Whether those pressures intensify depends on what policymakers do, how the economy performs and the return investors demand. The election can change those expectations; it cannot, on its own, settle the financing problem.

Frequently Asked Questions

Does divided government guarantee lower deficits?

No. Casey argues that compromise could preserve or increase spending. The budget outcome depends on the policies enacted and the economy, rather than the party-control label alone. ^1 3

Is the annual deficit the same as total government debt?

No. The deficit measures the gap between spending and revenue over a period. Outstanding debt is a stock built up over time. CBO's October 8, 2026 preliminary estimate put the fiscal 2026 deficit at about $2 trillion. ³

What happens to an existing fixed-rate bond when yields rise?

Its market price generally falls, while its contractual coupon remains fixed. Longer maturities generally involve more sensitivity to interest-rate changes. ⁶

Why can higher yields put pressure on stocks?

If investors demand a higher return on unchanged expected cash flows, those future payments are worth less today. Earnings growth and changes in the risk premium also influence the outcome. ⁷

Were Casey's AI policy scenarios enacted measures?

No. The interview presents his concerns about possible future oversight and intervention. Legislation and nominations follow different constitutional processes. ^1 8 9

Full Cleaned Transcript

Chris Casey: It wouldn't shock me if we're going into a 2028 election and you have 7% on the 10-year. You get so-called multiple compression because interest rates are rising. So stock up on inflation hedges: precious metals, real estate and cryptocurrencies.

The pre-election outlook

Maggie Lake: Joining me to discuss the US midterm elections and what they mean for investors is Chris Casey, founder and managing director of WindRock Wealth Management. Chris, great to see you.

Chris Casey: Hey Maggie, thanks for having me.

Maggie Lake: We are in the final days, the final hours, before Americans head to the polls. Some elections matter more than others. How important is this one?

Chris Casey: Everyone says every election is the most important ever. This one is important, but certainly not at that level.

I'm sure we're all happy it's about to be over. Between the advertisements and trying to watch any TV show, it's a lot.

I remember driving a couple of years ago and seeing a bumper sticker. You've probably seen it: "I'm voting for the giant meteor. Let's just end this already." Stuff like that.

Maggie Lake: Exactly. When you're in contested areas, which more people may be feeling now because more races seem close, every single ad. I wish we could take all that money and put it toward the deficit. That's another story.

Chris Casey: It's pretty nuts. I'm glad it's almost here, but I think it's evident who's going to win.

Prediction markets show something like a 65% chance Democrats take both houses, and at least another 30% that they get the House but maybe not the Senate. It's overwhelmingly in their favor.

Prediction markets aren't hyper-accurate, despite doing very well in the last presidential election, including battleground states. Look at Bolsonaro or the Israeli elections. They were dead wrong about both recently.

Maggie Lake: The polls are all garbage right now. You can't rely on the polls, with huge margins of error.

Chris Casey: I think Democrats will take both houses, primarily because they have more things going for them.

Republicans have redistricting help. Seven out of nine states changed redistricting to favor Republicans. Maybe the European riots help Republicans.

But Democrats have history on their side. Seven out of nine, or seven out of the last eight midterms, created divided government. They have better fundraising.

Supposedly there's much more turnout. I still don't understand why that favors Democrats in general, but they're saying it does. They're also saying it seems like there's higher turnout this year.

They have gas prices on their side. Whenever gas prices are over $4, incumbents tend to get thrown out. In Chicago, we're at $5 right now.

Lastly, there's Trump himself. Whether you look at approval or net approval, he's at record lows, a 37% approval rating.

When a president is below 50%, they tend to turn the bums out. On average, around 30 to 35 House seats are gone when that happens. I think it's going to be overwhelmingly a Democratic victory.

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Why gridlock could still matter

Maggie Lake: If that plays out, usually when one party holds the presidency and the other Congress, it means gridlock. The market is usually okay with that and likes it.

Does this time seem different? Why do investors need to care?

Chris Casey: For three reasons.

Historically, you're right. Markets tend to favor gridlock or divided government. Probably because no damage, or less damage, is being done. That's how I look at it.

There are things Democrats can do unilaterally, especially if they control both houses. They have investigative power. I'm sure they'll drag in every tech executive who's bent the knee to Trump over the past 18 months.

They have regulatory oversight. They'll hamper deregulatory efforts, especially in banking and maybe crypto. They'll impact AI as far as energy production. That's another factor.

They also control a lot of nominations. Think about a big-ticket item: presumably we'll have a Supreme Court vacancy in the next two years. History would suggest that.

Apart from what they can do unilaterally, gridlock is the way to look at it. Look at the past 18 months. Trump barely got anything passed despite controlling both houses.

When you don't control both houses, the only way to get anything passed is to give something to everybody.

If you thought the One Big Beautiful Bill Act was a giant omnibus bill with handouts for everybody, it's going to be far worse if anything is passed going forward.

I think increased spending and increased deficits, or at least the status quo if not increases, are around the corner.

The third reason this matters is not so much this election or the next two years, but 2028. Who wins, why they win and which issues concern voters will affect that election. That has repercussions for policy and markets.

Spending and the bond market

Maggie Lake: That's interesting because we'll start getting a teaser of what may be coming.

There's a lot to pull out, but on increased spending, bond investors seem to have woken up to the fact that we're racing at 80 miles an hour toward this giant wall of debt. Suddenly, it seems to matter. For so long, it didn't.

I don't know how sticky that is. But if we see more spending, with the president giving groups what they need to get anything through, will that elicit a response in the bond market? Do we worry about yields or some kind of crisis brewing?

Chris Casey: I certainly do. You're spot on.

Markets are slowly waking up, but it's like trying to wake up a teenager. Five snooze alarms, it's already 11:30 in the morning, and you're shaking them: "Get out. You've got to go to work or school."

That's how the bond market is reacting. It's taking forever.

Over the past two years, they've slowly started waking up. We've seen the 10-year and 30-year react appropriately this year. They've come down a little recently, but I could see rates going much higher as the investment community realizes there's no hope.

It's an existential threat to the US government. You've got $40 trillion in debt, you're bringing in five or six, and you're going to spend six, seven or eight. That's an existential threat.

I think the bond market will continue waking up. I wouldn't be surprised if rates were much higher two years from now. It wouldn't shock me if, going into the 2028 election, we have 7% on the 10-year.

Affordability and political pressure

Maggie Lake: If that happens, the affordability crisis isn't just one party's or one president's crisis. It's taking hold at the grassroots level.

When you talked about turnout, I think that's why. People are dissatisfied. Do you feel that growing sense of populism is rising in the US?

Chris Casey: I'd argue it's been here. You could argue Trump is a populist candidate in many ways. You could also argue this is a worldwide phenomenon we've seen over the past couple of years.

These tend to be so-called populist issues: affordability. I'm surprised no one was talking about that when we had 9% inflation. It didn't seem like they were then, but they certainly are now.

It's a major campaign issue primarily because your most basic expenses are more expensive.

Healthcare, that's government-derived, but it's more expensive. Our firm's healthcare went up a ton this year.

Then electricity, because of data centers, electricity needs and the fact that we haven't built out the grid in the past 50 years any more than we have. That's a big issue.

Food prices, and everything bubbling up from the Iran war, affect consumers.

I anticipate so-called populist issues continuing and being at the forefront of 2028.

Technology and utility oversight

Maggie Lake: You mentioned going after tech executives, anyone who sat with Trump. Is that a Democratic issue, or is it bipartisan now? There's a lot of backlash among voters. It seems grassroots.

Does that increase the likelihood of action? What does that look like?

They pull people before Congress all the time. They did it during the global financial crisis, and nothing happened. That was part of why everyone was angry.

What worries you about investigations and an eye toward technology?

Chris Casey: Beyond the aesthetics, I don't think it's what a free society should be doing.

From a policy standpoint, I'm more concerned about hauling in utility executives. "Why are you charging this?" They're going to put on price caps.

I'm worried about how this election will shape the 2028 election on those issues. If Democrats are in power in 2028 and there's a Democratic president, I wouldn't be surprised if it goes beyond regulation.

The word "nationalism" is not a word that should be used in free societies, but that's a word that will be used more commonly about AI over the next couple of years. It has direct implications.

Maggie Lake: We're seeing the government take big stakes now, right?

Chris Casey: That's a troubling trend, perversely from a so-called free-market perspective. It's basically socialism, owning the means of production, but they're viewing that as a benefit for the government.

The government has no business investing in private companies. Zero. It affects governance and strategy, with distorted, negative impacts.

That's accelerated under Trump. I remember researching this 10 years ago. The US government owned very few stakes in private companies, and even that was shocking.

Now they're not even getting their checkbook out. They're muscling in on transactions. I could see that continuing.

It creates a bad backdrop for future regulation because it makes it easier: "We own you. This is what you need to do," or, "We're your biggest customer. This is what you need to do."

Interest rates and stock valuations

Maggie Lake: We've talked about bond yields potentially moving higher if spending continues recklessly, which is a worry you have about the outcome.

What about equities? What should equity investors be thinking about in this new political era?

Chris Casey: History would show that equities are generally down in midterm years, then tend to rebound nicely the following year. Third years of presidential terms tend to be good, too. The basic background sounds good.

But equities will be affected when rates rise dramatically and quickly.

Bonds have been the most underreported story of the past five years, this horrible bond market. Nobody's talking about it, but bonds have continued losing money year over year. We're in a massive bear market that's unparalleled in recent history.

Equities are affected differently. In general, it's bad for equities, but it depends on what kind.

Anything whose value is primarily derived from long-dated future cash flows is at risk because those flows are discounted at higher interest rates.

A shorthand is high multiples. You get so-called multiple compression because rates are rising. It will affect equities, but not necessarily universally.

Taxes and changing political assumptions

Maggie Lake: Do you worry about taxes changing?

If you're talking about going after technology, there are concerns about the average worker, labor versus capital. If Democrats control Congress, do you see that situation changing?

Chris Casey: The so-called K-shaped economy, that kind of stuff.

Maggie Lake: Redistribution, trying to address the gap.

Chris Casey: We addressed this a couple of months ago. I can't remember the podcast title, but we talked about financial repression, and part of that was increased taxes.

There are billionaire-tax initiatives on ballots this year, and the wealth tax in California is a big one.

Yes, I'm worried. Clearly, that stuff is unconstitutional. People should be cognizant of it and plan accordingly.

There's a shelf life on my time in Illinois, I'll tell you that. Everyone needs to think like that. I think it's prudent. I'm concerned about taxes down the road.

Maggie Lake: We used to say, "Republicans are in charge, so we'll see lower taxes and government hands off industry." With Democrats, maybe we're thinking more about labor or higher taxes.

That seems like a gross oversimplification in this world where party definitions are blurred, with strange bedfellows and policies that seem unconnected to what listeners traditionally understood those parties to mean.

How are you navigating this when helping clients stay a step ahead?

Chris Casey: Some would argue we've basically had a uniparty in the post-Reagan period, with the seeds planted under Reagan. Philosophically, both parties merged quite a bit on foreign policy and spending.

Democrats used to be noninterventionist. They didn't care about the Soviet Union; they wanted to spend domestically. Now everyone has aggressive foreign policy and wants to spend. They don't talk about financial restraint.

For clients and investment themes, there are two major themes everyone should focus on over the next two to five years.

One is AI and everything associated with it: picks and shovels, energy, commodities and electricity.

Second is what I'd call the looming, imminent, eventual debt crisis, which will happen. That argues for every possible inflation hedge because I look at that debt as the present value of future inflation. That's what it's going to be.

Those are the two biggest themes. How does the election affect them?

For the debt crisis, it makes it worse. It certainly doesn't improve it. Maybe it stays the same.

For AI, it will have an impact, but how that shakes out over the next two to five years remains to be seen.

AI regulation and investment uncertainty

Maggie Lake: Is there a desire to slow the AI buildout, put on the brakes or handcuff it?

A lot of people have large AI positions and exposure. Is that a worry, or could oversight be good?

Chris Casey: It's a worry. We may have time, but I can see scenarios where we don't.

AI regulation is almost bipartisan. You see Republicans discussing it. It doesn't help when firms like Anthropic talk about an existential threat to humanity. It supports people calling for nationalization or anything short of it.

That will continue over the next couple of years. How it plays out could happen suddenly.

God forbid, one AI-induced terrorist incident or catastrophe, a plane falling out of the sky or locks on secure facilities opening, could hasten regulation almost immediately. I think you'd get widespread bipartisan support.

It's a possible long-term risk factor. You have to be diversified in AI. Don't just buy hyperscalers and think you're okay.

We may not be there yet, but something that interests me is whether Chinese technology or Chinese AI could be the eventual winner if America embraces nationalization or draconian regulation.

There are already arguments for why it may win, but under that scenario, I think it very well could.

Maggie Lake: Are you looking at exposure there? How are you thinking about it as an investment?

Chris Casey: We're still investigating. On the surface, it's compelling: much lower valuations.

You can almost have a pair trade, identical companies with the same function on either side of the Pacific.

But it's more complex. There are a whole bunch of issues dealing with Chinese firms. It's to be determined.

This election and how it transforms the 2028 narrative will push us one way or the other. That will be a leading indicator.

AI and inflation hedges

Maggie Lake: The idea of mirror trades is interesting. We talk about not having visibility into the future, which is hard enough from a macroeconomic perspective. Then you add political uncertainty about the next presidential election.

That could be a way to hedge if you can't identify the winner but feel certain about the trend.

It's not the same kind of mirroring, but the barbell idea is also important. Being in favor of inflation hedges, worrying about debt and thinking about real, hard or scarce assets can seem at odds with a pro-technology view.

That's not necessarily what I hear you saying.

Chris Casey: I get what you mean. I mentioned the debt crisis in America and AI as the two biggest themes for years to come.

You could have one clear winner and the other a clear loser. That could happen.

The one we're sure about is the debt situation. So stock up on inflation hedges: precious metals, real estate, cryptocurrencies and that kind of thing.

With sufficient positions there, you can take shots in higher-risk areas such as AI.

As long as the core base is well positioned, you can look at those other areas and everything benefiting from AI. It's not just who's creating it. Every industry benefiting, from biotech on down, offers opportunities.

What clients are asking

Maggie Lake: What's the common concern when you talk to clients?

It's an uncertain time. It feels like the rules are changing beneath us, and it's hard to see the future. What are you fielding most often?

Chris Casey: Interest rates. People may not know how rates affect their investments, but when they borrow from a bank or have a mortgage, they see it. They see gas prices. Those are issues.

There's concern about AI valuations. I can't fault people who argue it's a bubble. There are good arguments on their side.

Maybe there's a bubble-like aspect, but every bubble has real foundations, which AI does.

Valuations, especially in AI, rising interest rates and prices are probably the overall concerns.

Maggie Lake: That's why we keep coming back to diversification as a way to try to find a path forward.

Chris, fantastic to catch up. Thank you so much. It's going to be a wild election night, and we'll talk on the other side.

Chris Casey: Thanks a lot, Maggie.

Sources

¹ Wealthion, 7% Treasury Yields by 2028? The Midterm Warning, Chris Casey in conversation with Maggie Lake. Original pre-election interview. ² WindRock Wealth Management, Christopher P. Casey, official biography; Wealthion, WindRock Wealth Management, advisor-network profile. https://windrockwealth.com/team_members/chris-casey/ https://www.wealthion.com/partner/windrock-wealth-management/ ³ Congressional Budget Office, Monthly Budget Review: September 2026, October 8, 2026, Tables 1 and 3 and interest-outlay discussion. Fiscal 2026 figures are preliminary estimates. https://www.cbo.gov/system/files/2026-10/61985-MBR.pdf ⁴ US Government Accountability Office, Federal Debt Management: Treasury Is Meeting Borrowing Needs but the Deteriorating Fiscal Outlook Poses Risks, GAO-26-107529, March 31, 2026. https://files.gao.gov/reports/GAO-26-107529/index.html ⁵ Anthony M. Diercks and Dev Asnani, The Treasury Tantrum of 2023, Federal Reserve FEDS Notes, September 3, 2024. Historical analysis of the second half of 2023. https://www.federalreserve.gov/econres/notes/feds-notes/the-treasury-tantrum-of-2023-20240903.html ⁶ Securities and Exchange Commission, Interest Rate Risk: When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall, June 2013. Fixed coupons, market prices and maturity sensitivity. https://www.sec.gov/files/ib_interestraterisk.pdf ⁷ Kevin Lansing, Stock Market Valuation and the Macroeconomy, Federal Reserve Bank of San Francisco Economic Letter 2017-33, November 13, 2017. Cash flows, risk-free rates and risk premiums. https://www.frbsf.org/research-and-insights/publications/economic-letter/2017/11/stock-market-valuation-and-macroeconomy/ ⁸ USAGov, How laws are made, updated November 17, 2025. Passage by both chambers, presidential consideration and vetoes. https://www.usa.gov/how-laws-are-made ⁹ US Senate Historical Office, Advice and Consent: Nominations. Constitutional responsibility for presidential nominations. https://www.senate.gov/about/origins-foundations/senate-and-constitution/advice-and-consent-nominations.htm

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