Investors brace for fiscal fallout as a legal ruling rattles US economy
Treasury yields jumped Tuesday as a federal court ruling striking down most of president Donald Trump’s tariffs raised concerns about potential government refunds that could strain an already stretched US fiscal situation.
The benchmark 10-year Treasury yield climbed 5 basis points to 4.281%, while the 30-year bond yield increased more than 5 basis points to 4.977%. The 2-year Treasury yield moved three basis points higher to 3.658%. By Wednesday, Dow Jones reported the 10-year yield had risen further to 4.276%, marking its largest one-day gain since August 14 and highest level since August 21.
The yield increases followed a federal appeals court ruling Friday that determined most of Trump’s global tariffs are illegal in a 7-4 decision. The court stated that “the core Congressional power to impose taxes such as tariffs is vested exclusively in the legislative branch by the Constitution.”
“If this ruling is upheld, refunds of existing tariffs are on the table which could cause a surge in Treasury issuance and yields,” wrote Ed Mills of Raymond James in a note to clients.
The tariff revenue has provided significant financial support to the federal government, with duties set to bring in $172.1 billion in 2025, according to the Tax Foundation. This revenue stream helped offset concerns about the country’s ballooning budget deficit.
Ed Yardeni, president and chief investment strategist with Yardeni Research, warned that “the Bond Vigilantes might start acting up again if they can no longer look forward to a significant reduction in the federal deficit attributable to tariff revenues.”
Minimal impact despite rate cuts
The rising bond yields present challenges for mortgage borrowers who were hoping for relief from elevated rates. CBS News reports that while the Federal Reserve is expected to cut rates by 25 basis points at its September 17 meeting, with chances sitting around 90% according to the CME Group’s FedWatch tool, the impact on mortgage rates may be limited.
“A Fed rate cut is undoubtedly better for homebuyers and owners than a hike, the first cut to be issued in 2025 is likely to have a muted impact on mortgage rates, at least in the beginning,” CBS News reported.
The disconnect between Fed policy and mortgage rates stems from multiple factors. Mortgage lenders may have already priced in anticipated rate cuts, and the 10-year Treasury yield serves as a major influence on mortgage pricing beyond the federal funds rate.
“It’s going to take more than a lower federal funds rate for mortgage rates to decline in a major way,” according to the CBS News analysis.
International bond markets also showed stress, with 30-year yields in Germany hitting their highest since 2011 and French long-bond yields reaching their highest since 2009.
The jump in yields pressured equity markets, with the Dow Jones Industrial Average declining more than 500 points Tuesday.
Investors await key economic data this week, particularly Friday’s nonfarm payrolls report and unemployment rate for August, which will influence the Fed’s interest rate decision later this month.
What are your thoughts on the recent data? Share your insights in the comments below.
