Typically, conventional wisdom takes a significant amount of time to make a complete turnaround. However, when it comes to anything related to Trump, it seems to happen in just under 6 months.
Back in early April, after the announcement of reciprocal tariffs on Liberation Day, US bond markets took a sudden nosedive. This triggered a collapse in hundreds of billions of basis trades and raised concerns about a potential global economic crisis. During that time, tariffs were widely viewed as negative, and anyone who suggested otherwise, like this website, was criticized as being economically ignorant. Fast forward to the present day, and the tables have turned. The mere suggestion of tariffs being removed is now considered one of the biggest threats to bond market stability!
According to the Financial Times, Trump’s tariffs are now seen as a crucial factor in keeping Treasury investors engaged. The same tariffs that were initially blamed for the market turmoil back in April are now being hailed as a key revenue stream that offsets the costs of significant legislative bills. Investors are now banking on the revenue generated by tariffs to counterbalance tax cuts and prevent excessive US borrowing.
Andy Brenner, head of international fixed income at NatAlliance Securities, emphasized the importance of tariff revenue, stating that if it suddenly disappears, it would pose a significant problem for the US government’s debt reduction efforts.
Recent reports from S&P and Fitch also acknowledged that tariff revenues played a role in preventing a downgrade of the US sovereign rating. The Congressional Budget Office projected that Trump’s tariffs could generate $4 trillion in government revenues over the next decade, helping offset the borrowing increase resulting from tax cuts.
The shifting market sentiment follows months of uncertainty surrounding Trump’s economic policies, including trade disputes with countries like China and criticisms of the Federal Reserve. The recent appeals court ruling overturning Trump’s tariffs caused a sell-off in US Treasury bonds as investors feared a reduction in tariff revenues could lead to increased Treasury issuance.
Thierry Wizman, a global rates strategist at Macquarie Group, highlighted the potential consequences of eliminating tariffs, noting that it could impact inflation, economic growth, and monetary policy decisions by the Fed. The focus on debt and deficits could lead to market volatility.
Robert Tipp, head of global bonds at PGIM Fixed Income, expressed hope that tariff revenue could help manage the budget deficit. However, investors remain wary of the significant borrowing requirements of the US government.
Despite the benefits of tariff revenue, concerns persist about the US government’s excessive spending. Without tariff income, the CBO predicts that US debt relative to GDP could surpass historical highs by 2029.
The fate of the US bond market now rests with the Supreme Court, whose decisions are often politically motivated. The recent appeals court ruling against Trump’s tariffs has been appealed to the Supreme Court, delaying any immediate changes. If Trump loses this appeal, a crucial revenue source could disappear, leading to uncertainty and potential market instability.
Trump has warned of catastrophic consequences if the Supreme Court upholds the appeals court decision, highlighting the significance of the ongoing legal battle.
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