US tariff turmoil leaves Treasury markets dazed

Highlights:

• Supreme Court strikes out slew of Trump tariffs
• Ruling unleashes new uncertainty over refunds, trade policy
• Treasuries dip in New York; futures steady in Asia, dollar sinks

Far from being a source of relief, the Supreme Court's takedown of President Donald Trump's tariffs has infused new risks and uncertainties into trade policy, US debt and the dollar.

The Court made no decision on refunds, leaving open the possibility of a hole of around $170 billion in US finances. Trump's furious rush to impose replacement levies has already raised hackles in Europe and fresh confusion about trade policy.

The dollar slid through Monday in Asia, most notably against havens such as the Swiss franc and yen, while Treasuries have been stumped as markets struggled to come to grips with risks to the fiscal position and untangle the implications for inflation.

The clearest takeaway seems to be that Trump's replacement tariffs are lower and should ease short-term price pressures. But the Court has also crimped his power and the consequences of that for markets and the economy are unpredictable.

"Uncertainty is back, and given the latest muscle-flexing by European leaders, the risk of escalation is now higher than it was a year ago," ING analysts said in a note.

For Treasuries, one risk is litigation in pursuit of refunds - something likely to spend months in lower courts.

Estimates for the revenue raised so far by tariffs run above $175 billion, a modest piece of total projected revenues of more than $5 trillion, but enough to risk extra fundraising.

Dan Siluk, head of global short-duration and liquidity at Janus Henderson, said refunds will mean higher debt issuance.

"At the margin, that raises the risk of further steepening pressure at the long end of the curve, particularly if refund-related issuance coincides with already elevated borrowing needs and ongoing QT (quantitative tightening)," he said.

Yields on 10-year Treasuries moved a touch higher to 4.1% on Friday but have come down from peaks above 4.5% in mid-2025, alongside signs of cooling inflation and expectations for Fed rate cuts. The curve has steepened, led by a drop in short-term yields.

On Monday, the cash market was closed in Asia owing to a holiday in Tokyo but the futures-implied yield was a fraction lower at 4.05%.

"Markets are currently focused on the short-term impact – namely, lower inflation and interest rates falling more quickly," said Alberto Conca, chief investment officer at LFG+ZEST in Lugano, Switzerland.

"I think that's rather short-sighted, though, because it increases an already enormous deficit, and yield curves ought to steepen more significantly given that the US government's finances are, effectively, out of control."

Revenue uncertainty

The Congressional Budget Office had estimated that Trump's tariffs would generate about $300 billion annually over the next decade for the world's largest economy.

Trump's 15% replacement tariff lasts only for 150 days and it is not yet clear exactly when or on whom it would be imposed. Some, including Britain and Australia, had 10% rates under the former rule, while many Asian countries had higher rates.

"The bond market faces the biggest concern," said Gene Goldman, chief investment officer at Cetera Investment Management, citing bigger issuance should the government be forced to issue refunds while also footing other stimulus bills.

To be sure, the market has not reacted significantly and there is a view that a longer-lasting fallout can be avoided.

Analysts at Morgan Stanley are in the camp that the debt market will not worry much about the fiscal deficit, both because Trump will find substitutes for tariffs and because any potential extra funding will be via shorter Treasury bills.

Trump also may not be able to fulfil his wish to give every American a $2,000 tariff dividend cheque, which would have been another source of some inflation.

Still, another round of policy and revenue uncertainty is underway. So far the reaction of the dollar has been to extend losses - it shed about 0.4% on the euro on Monday, for a drop nearing 12% since Trump's second term began in early 2025.

The outlook hinges on how traders look through the chaos. Barclays analysts said the Supreme Court's ruling could be seen as an example of checks and balances in operation, and should take some of the risk premium out of US assets and the dollar.

Others are focused on inflation.

"When you have this much liquidity and lowering of tariffs this all fuels growth and causes rates to rise," said Eddie Ghabour, CEO at Key Advisors Wealth Management in Delaware.

"These things can also cause inflation to accelerate in the months to come. I think the bond market is sniffing this out."