United States Treasury yields jumped in overnight trading following revelations that the Trump Administration may - in the wake of a court decision knocking down most of the tariffs - have to repay monies already collected.
Having been initially worried about Trump’s tariffs driving yields higher, the market view changed over the U.S. summer, with bond investors heartened by the extra revenue being raised.
However, that confidence is starting to unravel on the prospect of tariff money having to be paid back, especially given the highly delicate state of America’s fiscal situation.
“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 client note.
According to Ed Yardeni, investment strategist at Yardeni Research, 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.
At their highs of the session, the 30-year yield topped 4.97%, its highest since late July, while the 10-year hit a high of 4.279%, its highest since Aug. 27.
Meanwhile, the 2-year Treasury yield moved 3 basis points higher to 3.658%. One basis point is equal to 0.01% and yields and prices move in opposite directions.
What bond traders were reacting to was the federal appeals court ruling on Friday, which concluded that most of Trump’s global tariffs – which are set to haul US$172.1 billion (A$262.7 billion) in 2025 - are illegal.
The court determined in a 7-4 ruling that only Congress has the power to implement sweeping levies.
The judges ruled Trump had exceeded his power by invoking emergency powers to impose tariffs of “unlimited duration on nearly all goods from nearly every country in the world”.
The ruling also throws into disarray the strategies of trading partners still in negotiations with the U.S., who may decide to wait and see the outcome of the legal battle.
Meanwhile, Trump plans to appeal the ruling in the U.S. Supreme Court, having accused the federal court’s decision of being “highly partisan”.
“The core Congressional power to impose taxes such as tariffs is vested exclusively in the legislative branch by the Constitution,” the court said.
The duties remain in place for now, with a stay in place until October 14.
Meanwhile, rates overseas were also jumping, with 30-year yields in Germany hitting their highest since 2011, while French long-bond yields hit their highest since 2009.
It’s understood that bond markets in Europe are reacting to the impact of reforms to the Netherlands' pension system which are now surfacing.
While the Dutch economy accounts for only 7% of the eurozone, it holds more than half of the eurozone's total pension savings.
The Netherlands' holdings of European bonds amount to about 300 billion euros, the largest in the EU.
As the Netherlands reforms its pension system toward so-called lifecycle investing, it is being designed to readjust exposure to interest rate movements and the proportion of hedging products.
Around 36 funds will switch to the new system from January 1 next year, and the remaining funds will transition sequentially every six months until January 2028.
Since bonds will be rebalanced more frequently, they may be exposed to interest rate changes more often, and large-scale liquidation of hedge positions could affect the bond market.
