US Supreme Court ruling overturning Trump tariffs could spook bond vigilantes

Donald Trump

• Supreme Court strikes down Trump's sweeping tariffs
• Markets rally but bond yields edge higher on uncertainty
• Refunds to companies could total $150-$200 billion

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The U.S. Supreme Court's Friday ruling striking down President Donald Trump's sweeping tariffs prompted 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 invoke other powers 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 emergency powers law that he used to justify the duties. The government may now have to pay back $150 billion to $200 billion to U.S. and foreign companies that paid them, in a possible boost for automakers, consumer goods importers and other sectors that could at the same time drain the government's coffers , said investors.

In a Friday afternoon press conference, Trump said he will impose a blanket tariff of 10% on U.S. trading partners, becoming the first U.S. president to invoke section 122 of the 1974 Trade Act. He also said he will investigate other powers for imposing a fresh round of levies. If he succeeds, the long-term impact of Friday's ruling on the market may be muted.

Treasury Secretary Scott Bessent said in a speech to the Economic Club of Dallas that the net result of the court decision and Trump's new proposals "will result in virtually unchanged tariff revenue in 2026."

The benchmark S&P 500 stock index, opens new tab initially rose about 0.5% on the news and after a bumpy trade ended the day 0.69% higher. Retailers, other consumer cyclical stocks and ETFs with exposure to overseas markets largely outperformed the broad market, while the State Street SPDR S&P Retail ETF ended the day with a 0.72% gain after seeing some big swings.

Shares in some major U.S. trading partners fared better, with the iShares MSCI Mexico ETF (EWW.P), opens new tab climbing 1.61% by the end of the trading day, the iShares MSCI South Korea ETF (EWY.P), opens new tab logging a 4.98% gain and Canada's TSX

Composite Index (.GSPTSE), opens new tab rallying 0.66%.

"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."

Yields on the 10-year Treasury edged higher to 4.08% by late afternoon Friday, up 1 basis point or 0.01%.

"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," said Nick Rees, head of macro research at Monex Europe in London. "Because it's quite a big bill."

The Supreme Court justices did not address the specifics of whether and how refunds should be handled. 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 key source of uncertainty is what the administration does in response," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York, adding: "What matters for the fixed income market is forward collections of tariffs."

The fate of Trump's next round of tariff proposals and those refunds raises questions about how much revenue can be generated from trade levies to service the $30 trillion pile of U.S. government debt. There remains the risk that bond vigilantes will punish government profligacy with a Treasury selloff that drives up yields.

After an initial jump in bond yields Friday, bond traders noted selling pressure had abated. If prices recover, then yields will go down again.

"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.