(Bloomberg) -- The Supreme Court decision striking down President Donald Trump's sweeping global tariffs reverberated across the $30 trillion US bond market by threatening to increase the government's budget deficit and pour fuel on an economy already contending with elevated inflation.
The drop was led by longer-dated bonds most exposed to the fiscal risks in the years ahead, which pushed 30-year Treasury yields up as much as 6 basis points to 4.75%, before paring the gain. The dollar dropped, snapping a four-day advance.
The top court's verdict eliminates import taxes that have acted as a restraint on the government's $1.8 trillion budget deficit and the swelling national debt. It also removes a source of uncertainty that has exerted a drag on the economy as global supply chains were upended and businesses waited to see if Trump's tariffs would pass legal scrutiny.
Trump said he planned to maneuver around the ruling by using other authority to impose tariffs that he said could raise even more than those that were ruled illegal. While he said he would approve a new 10% global tariff, the long-term outlook still remained unclear, given that the provisions of the law he invoked involves temporary duties.
"It's a short-term vehicle," said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. "The devil will be in the details with various trade deals to date."
The reaction was relatively contained because traders have largely anticipated the decision since the justices expressed skepticism about the administration's arguments. Analysts had also expected Trump to find a way to maneuver around such a ruling to keep his trade war intact, though Treasuries held their losses after he announced plans to do so.
The deficit has weighed on the US debt market — and helped to keep interest rates elevated — by forcing the market to absorb an ever-rising amount of new Treasuries.
The tariffs helped to offset the impacts of Trump's tax cuts, which are set to increase the government's shortfall significantly in the years ahead. The Tax Foundation estimated that the tariffs at issue in Friday's verdict would have raised over $1 trillion over the next decade.
Treasury Secretary Scott Bessent said Friday that new measures to be taken by the administration would offset the fiscal impact and leave tariff revenue virtually unchanged in 2026.
But in the short-term, it's possible that the government will need to increase the pace of its Treasury bill sales to cover any shortfalls. Moreover, the Supreme Court left it to a lower court to sort out how to handle potential refunds of the $170 billion collected under the now-defunct tariffs.
"The revenue shortfall created by the tariff strike-down will very likely be funded via T-bill issuance, which should add incremental pressure to USD repo markets," said Angelo Manolatos, rates strategist at
What Bloomberg strategists say...
It's well-advertised that Trump has at least five fallback options to impose tariffs in different ways. If he were to choose a lighter touch on tariffs, that would lessen any real or perceived inflation threat and bode well for his affordability campaign. In any case, either scenario would put a cap long-bond yields."
— Alyce Andres, Macro Strategist, Markets Live. For the full analysis, click here.
Treasury yields were already higher before the ruling, after sticky inflation readings cast further doubt on the outlook for interest-rate cuts from the Federal Reserve. They remained elevated into the end of the US trading session, with two-year yields 2 basis points higher at 3.48%. The 30-year rate was up 2 basis points at 4.72%.
The inflation gauges in the December personal income and spending figures rose more than estimated, highlighting concerns several Fed policymakers have expressed about resuming interest-rate cuts. After easing policy late last year, the central bank has since paused as the labor market shows signs of stabilizing and the economy continues to expand at a solid pace.
While the tariff ruling has the potential to allay concerns about inflation stemming directly from them, giving the Fed more freedom to cut rates, that factor is less important to the market than the potential deficit impact and the relief the ruling provides to companies, said Blake Gwinn, head of US rates strategy at RBC Capital Markets.
The ruling is "a growth-positive, risk-positive story," Gwinn said. That should "overwhelm any idea that yields should be lower on lower inflation or allowing the Fed to cut."
--With assistance from Miles J. Herszenhorn, Ye Xie, Carter Johnson, Edward Bolingbroke and Elizabeth Stanton.
(Updates to add quotes in fourth, 11th paragraphs, latest prices throughout.)
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