US Midterms and Iran Risks Threaten Bond Markets and Financing Costs
Dr. Ilan Gildin warns of a dual market threat from US midterms and potential Iran escalation, highlighting risks to Israel's bond market, real estate, and financing costs.
As the United States heads to the midterm elections on November 3, and amid potential risks of renewed escalation with Iran following the vote, Dr. Ilan Gildin, partner and hedge fund manager at Karni Family Office, warns of a dual threat to global markets: political gridlock in Washington coupled with potential energy shocks. According to Gildin, the primary risk to the Israeli economy may manifest through the bond market and escalating financing costs rather than mere equity volatility.
"The US elections will not necessarily end the uncertainty. The real risk could begin in the two weeks following them," Gildin notes. He assesses that a divided government might soothe Wall Street, but it will fail to resolve the underlying debt crisis.
Capital markets and commodity prices are approaching two significant catalysts of uncertainty: the outcome of the US midterms and the prospect of renewed military escalation with Iran in their wake. The baseline scenario priced in by markets is a divided government, in which Republicans could lose their majority in one or both chambers of Congress.
The Bond Market Dilemma and Debt Pressures
Historically, Wall Street has tended to view a divided government as a brake on radical legislative initiatives, corporate tax hikes, and fiscal expansion. However, this time the starting point is exceptionally fragile: the federal deficit for fiscal year 2026 reached approximately $2 trillion, the national debt crossed the $40 trillion threshold, and long-term yields continue to exert pressure on financing costs. With the Federal Reserve maintaining interest rates in the 3.75% to 4% range, prolonged legislative gridlock is not necessarily good news for the bond market.
Gildin adds that the week to two weeks following the elections represent a particularly sensitive window for broader military escalation involving Iran. Prior to the vote, the administration has a clear incentive to avoid any shock that would drive gasoline prices higher for American consumers.
Inflationary Risks and Energy Supply Chains
However, once the vote concludes, immediate political pressure diminishes, though certainty regarding military action remains elusive. With supply chains already strained, Brent crude trading above $100 per barrel, and European diesel refining margins standing at high levels of tens of dollars per barrel, further disruption to shipping lanes in the Strait of Hormuz or energy infrastructure in the Gulf could once again spike energy prices. The consequence would be a renewal of inflationary pressures and a reduction in central banks' capacity to cut interest rates.
Implications for the Israeli Economy
The impact will not be uniform. The United States is in a relatively strong position as an energy exporter, with crude oil exports reaching a peak of 5.6 million barrels per day in April, alongside long-term liquefied natural gas export contracts. Conversely, Europe and energy-importing emerging markets remain vulnerable to stagflationary pressures: a combination of slowing growth and elevated inflation.
In Israel, further regional escalation could prolong fiscal burdens and combat expenditures, intensify the Finance Ministry's borrowing needs, and exert upward pressure on long-term government bond yields. This will weigh primarily on domestic, leveraged sectors, including real estate, construction, and banking, whereas international technology firms and Israeli defense exporters with dollar-denominated revenues may demonstrate relative resilience.
Ultimately, Gildin assesses that the US midterm elections will not dispel market uncertainty. For financial markets, they may merely serve as the opening chapter of a more complex phase of geopolitical decisions in the Middle East.
