Possibility of Tariff Refunds Under Trump Administration
Fiscal Deficit Concerns Drive Treasury Yields Higher
Yields on U.S. Treasury bonds are surging in the wake of a court ruling that deemed reciprocal tariffs unlawful. Analysts attribute the rise in Treasury yields to growing expectations that the administration of former President Donald Trump may be required to refund tariffs.
On September 2 (local time), the yield on the 30-year U.S. Treasury bond stood at 4.98%, up 7 basis points (1bp = 0.01 percentage point) from the previous trading day. The 10-year yield rose by 5 basis points to 4.29%, while the 2-year yield increased by 4 basis points to 3.67%.
This sharp rise in yields follows the court’s decision on August 29. The U.S. Federal Circuit Court of Appeals ruled by a 7-to-4 vote that the reciprocal tariff measures imposed globally by the Trump administration under the International Emergency Economic Powers Act (IEEPA) were unlawful. However, the court suspended the effect of the ruling until October 14, considering the possibility of an appeal, and former President Trump immediately announced his intention to appeal. Tariffs on specific items such as automobiles and auto parts, steel, and aluminum, which are based on Section 232 of the Trade Expansion Act, are not affected by this ruling.
The possibility of tariff refunds has heightened concerns about increased fiscal burdens, which is now reflected in Treasury yields. With worries about an expanding fiscal deficit already mounting due to large-scale tax cuts, the need to return tariff revenues to U.S. importers would make additional Treasury issuance inevitable. This would increase the supply of Treasuries and lead to higher interest costs, further fueling upward pressure on yields. U.S. Treasury Secretary Scott Besant previously stated that tariff revenues could reach 1 trillion dollars this year.
However, since six of the nine Supreme Court justices were appointed by Republican administrations, creating a 6-to-3 conservative majority, there is speculation that the Supreme Court could issue a ruling favorable to former President Trump.
Ed Yardeni, President and Chief Investment Strategist at Yardeni Research, commented, "If expectations that tariff revenues will significantly reduce the federal deficit disappear, the bond vigilantes could return to action."
Amid projections that the Trump administration may have to refund tariff revenues to U.S. importers, Treasury yields are soaring.
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