Trump Tariffs: The Sole Lifeline for U.S. Bonds Faces Potential Disruption with Court Ruling

TradingKey - In a global environment where long-term bond yields remain elevated, traders have turned to the revenue generated from Trump's tariffs as a crucial support for U.S. fiscal stability, viewing it as a key pillar for the bond market. However, last Friday, a U.S. appeals court declared much of Trump's global tariff policy illegal, shaking this foundation.

Back in April, the Trump administration's tariff policy rattled global markets, sparking fears of economic upheaval due to the tariffs. Yet now, investors have begun to rely on the trillions of dollars expected from tariffs to fill the fiscal gap left by tax cuts, aiming to improve the U.S.'s towering debt situation and thus control the government's borrowing scale to further stabilize the bond market.

Analysts suggest that last Friday's ruling could be a catalyst for the sale of U.S. government bonds this Tuesday and Wednesday, as investors worry that a reduction in tariff income could lead to increased issuance and an oversupply of treasuries, putting pressure on prices.

Although the court currently allows the tariff policy to remain in place until October 14, market confidence has been shaken, and the sustainability of tariff revenue is now in question.

Tariffs: The Only Short-Term Solution to Debt Reduction

Previously, the non-partisan Congressional Budget Office (CBO) predicted that Trump's tariff policy would add $4 trillion to U.S. government revenue over the next decade. At the same time, tax cuts are expected to increase government borrowing by $4.1 trillion.

Recent data show that U.S. tariff income in August exceeded $30 billion, marking the highest monthly total so far in 2025. This year's tariff income has already surpassed $183 billion. Analysts note that at the current pace, the U.S. could collect an amount equivalent to last year's total tariff revenue in just 4 to 5 months.

Andy Brenner, head of international fixed income at NatAlliance Securities, stated that using tariff revenue and a share of sales from chip companies in China is the only way for the U.S. government to reduce outstanding debt in the short term. "If suddenly tariff revenue disappears, then we're in trouble," he said.

Des Lawrence, senior investment strategist at State Street Global Advisors, further explained that given the scale of U.S. government spending, the CBO projects that without tariff revenue, the U.S. debt-to-GDP ratio could surpass the peak levels seen during World War II by 2029.

Even credit rating agencies like S&P and Fitch have indicated that the substantial tariff revenue is a factor in their decision not to further downgrade the U.S. sovereign credit rating.

Despite the tariff revenue filling fiscal gaps for now, Lawrence noted that U.S. spending far exceeds its income, which remains a significant problem. According to data from the U.S. Treasury, as of August 18, U.S. debt had nearly reached $37.2 trillion.

Implications of Tariff Invalidations for Treasuries

Thierry Wizman, global rates strategist at Macquarie Group, stated that if most of Trump's tariffs are invalidated by the court, some analysts might welcome the decision, as it could lead to reduced inflation, improved economic growth, and a Federal Reserve more inclined to ease monetary policy. However, if attention shifts to debt and deficits, the bond market could experience turmoil.

In facing this possibility, Wizman added that the cancellation of tariffs while the tax cuts remain in effect poses the primary risk to treasuries in the coming weeks.

Raymond James analyst Ed Mills mentioned another, more dire consequence: if the Supreme Court upholds the ruling, the government might not only lose a significant fiscal resource but also have to refund tariffs, potentially leading to a surge in treasury issuance and yields.

The tariff ruling will also impact other assets. Trump noted that the U.S. stock market decline on Tuesday, September 2, was influenced by the court's latest decision, "because the stock market needs tariffs, they want to see tariffs." On that day, all three major U.S. stock indices fell and closed lower for two consecutive sessions, reaching at least a week-low.

Trump stated that a loss would create an "unprecedented turmoil," but if they succeed, the stock market will "skyrocket."