The future of President Donald Trump’s trade policy is in question after an appeals court late Friday upheld a previous court’s ruling which found that a significant portion of the president’s tariffs are illegal. The uncertainty could lead to more volatility in the bond market—and potentially push longer-term Treasury yields higher.
The U.S. government brought in $28 billion from tariffs in July. Investors have been banking on this steady stream of revenue to keep coming in; the money that could help reduce the budget deficit of $1.6 trillion. The ruling—which Trump dubbed an incorrect decision by a “highly partisan appeals court” in a Truth Social post—said that the tariffs will remain in effect until mid-October. But any disruption to tariff payments after that could have a negative impact on bond yields.
“With tariff collection expected to increase revenues/decrease deficits by $4 trillion over 10 years, the Treasury Department can scale back its bond issuance accordingly. This reduced supply of new Treasuries, all else equal, tends to support bond prices and can help contain yields,” said Lawrence Gillum, chief fixed income strategist for LPL Financial, in a report published on Wednesday before the court’s ruling. Bond prices move in the opposite direction of yields.
“For a government managing substantial debt levels, this revenue diversification provides fiscal flexibility that markets generally view favorably,” Gillum added.
Along those lines, the yield on the 10-Year U.S. Treasury note has edged lower lately, falling from about 4.5% in mid-July to a current level around 4.23%.
Tariff payments are part of the equation, but bond yields have also tumbled because of weaker jobs numbers as of late. That has boosted the odds of that the Federal Reserve could cut interest rates in September, with the market predicting further easing from the Fed later this year and throughout 2026.
While tariffs are expected to help reduce the deficit, some on Wall Street are concerned about other deleterious effects on the economy. Tariffs could boost prices, which may hurt consumer spending. Higher input costs from tariffs may also reduce corporate profit margins, if companies decide to not fully pass on the tariff-related expenses to consumers.
“We believe investors should be more concerned about inflation than a growth slowdown for now,” said Paul Beland, global head of research for wealth management at CFRA Research, in a Friday morning report.
“The combination of tariffs…and fiscal stimulus will potentially push inflation higher, even as growth moderates. This creates a policy conundrum for the Federal Reserve, making significant interest rate cuts unlikely,” Beland added.
Add that up, and it could mean that long-term bond yields will remain higher for longer—even if Trump’s tariffs are ultimately allowed to remain in effect and help to reduce the deficit. It’s sort of a no-win situation. Tariffs could be a win on the fiscal policy front, but it would complicate the calculus for the Fed concerning interest rates.
Write to Paul R. La Monica at paul.lamonica@barrons.com
