US Supreme Court ruling overturning Trump tariffs could spook bond vigilantes

The US. Supreme Court’s Friday ruling striking down President Donald Trump’s sweeping tariffs produced a muted rally in global stock markets while stoking worries among so-called bond vigilantes about government finances and higher bond yields.

The decision could dent risk appetite among investors, especially after Trump announced Friday afternoon, as widely expected, that he will explore other options to re-impose the import duties. That could weigh on sectors with high foreign revenues or those sensitive to changes in the price of raw materials and components, investors said, citing tech, materials, energy, and industrials.

The court upheld a lower court’s decision that the Republican president exceeded his authority under the 1977 law that he used to justify the duties. The government may now have to pay back $150 billion to $200 billion to US. and foreign companies that paid them. This could boost automakers, consumer goods importers and other sectors, said investors.

The benchmark S&P 500 stock index initially rose about 0.5% on the news and after a bumpy trade was up 0.4% mid-afternoon. Retailers, other consumer cyclical stocks and ETFs with exposure to overseas markets enjoyed a healthy bounce initially, while the State Street SPDR S&P Retail ETF, which tracks large retailers, gyrated from a small loss to a small gain of 0.5%.

Shares in some major US. trading partners fared better, with the iShares MSCI Mexico ETF 1.26% ahead, the iShares MSCI South Korea ETF logging a 4.29% gain and Canada’s TSX Composite Index rallying 0.40%.

“Certainly, the effect will be positive for consumers and exporters,” said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan. “Therefore, it’s positive for the stock markets, especially in countries that were significantly affected. I think that stock markets in general will have a chance to find a catalyst to rise after weeks of trading sideways.”

Yields on the 10-year Treasury edged higher to 4.09%, up 2 basis points or 0.02%.

“Whether the market reaction sticks is going to depend on the details,” said Nick Rees, head of macro research at Monex Europe in London. “The big thing we’re missing right now is, to what extent does the federal government have to pay back all the money they’ve raised? Because it’s quite a big bill.”

The Supreme Court justices did not address the specifics of whether and how refunds should be handled. In his dissent, Justice Brett Kavanaugh flagged this; he had previously cautioned this could become “a mess.”

“The key source of uncertainty is what the administration does in response,” said Gennadiy Goldberg, head of US. rates strategy at TD Securities in New York, adding: “What matters for the fixed income market is forward collections of tariffs.”

Penn-Wharton Budget Model economists put the refund figure at around $175 billion, Reuters reported Friday. Still, trade experts believe that process will be legally fraught and refunds are by no means guaranteed.

The ruling also cast doubts over what forecasters said could be trillions of dollars of revenue over the next decade to service the $30 trillion pile of US. government debt. This could add to growing market unease over the size of the US. deficit, and could encourage bond vigilantes to punish government profligacy with a Treasury selloff that drives up yields.

“Fixed income yields jumped over concerns that the US. Treasury is now going to have to pay a significant amount back to US. corporations. This would lead to a higher deficit and a potential degradation in credit standards of the United States,” said Phil Blancato, chief market strategist at Osaic, in New Jersey.

After that initial reaction, bond traders noted the selling pressure driving yields higher had abated.

“We think that we have seen the lows in the 10 year and it should start trending higher,” said Eddie Ghabour, CEO of KEY Advisors Wealth Management, adding that the bond market anticipates inflation pressures are building with stimulus from tax cuts, Fed liquidity and lowered tariffs.

LIBERATION DAY ROUT

Trump’s April 2 “Liberation Day” tariffs sparked a selloff in global stocks and US. Treasuries, and his erratic trade policies continued to cause turbulence across asset classes last year, including another major selloff in October.

An April bond market crash forced the administration to temper its plans, pausing some tariffs as it pursued new trade agreements and removing or reducing others after those pacts were struck. Thousands of companies around the world have filed lawsuits challenging their legality and seeking refunds.

In his Friday afternoon press conference, Trump noted that the court’s decisions relate only to IEEPA emergency tariffs, not to tariffs as a broader category. He said he will rely on other legal authorities to impose a fresh round of levies, suggesting the long-term impact of Friday’s ruling may be muted.

Jeff Leschen, managing director at Bramshill Investments in Florida, said investors will need to take time to digest the news given Trump’s strategy. “I don’t expect there will be major revisions to the S&P targets for the year.”