Live Markets: Tariff case raises investor concerns over deficit

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06/11/2025 15:25

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TARIFF CASE RAISES INVESTOR CONCERNS OVER DEFICIT

A selloff in longer-dated Treasuries on Wednesday shows that fiscal concerns are a primary issue for investors if U.S. President Donald Trump’s tariff policies are struck down, as they worry about rising debt levels to fund a worsening U.S. budget deficit.

Benchmark 10-year yields US10YT=RR gained 6.6 bps on the day on Wednesday, for example, while two-year yields US2YT=RR gained 4.8 bps as the U.S. Supreme Court justices raised doubts on Wednesday over the legality of Trump’s sweeping tariffs in a case that marks a major test of his powers.

“The fact that the biggest moves in Treasuries were at the long end of the yield curve suggests that concerns about the supply/demand balance and the fiscal position may be at least as important as the path of the fed funds rate. The loss of tariff revenue would resurface some hard questions about the deficit,” Thomas Mathews, head of markets, Asia Pacific at Capital Economics said in a report.

Mathews notes that Wednesday’s market reaction was smaller than when tariffs were introduced earlier in the year. That may be due to expectations that if these tariffs are no longer possible the government would replace them with others.

“That would limit the size of any fiscal stimulus, even if the administration would be unlikely to be able to offset the lost revenue completely,” he said.

This along with renewed uncertainty over tariff rates may also limit stock market gains.

Meanwhile, the impact of tariffs on inflation also appears secondary to other concerns, with the trade duties so far not having a large impact on price pressures.

“Their direct boost to inflation has, of course, not been especially large so far, although the small falls in near-term inflation swap rates yesterday suggest that investors do think their removal would have some disinflationary effect,” Mathews said.

(Karen Brettell)

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