Why the Supreme Court Tariff Reversal May Flip Treasury Yields – Investor Alert

• You missed the warning sign when the Supreme Court struck down Trump’s emergency tariffs – and Treasury yields are reacting.
• Yield curve flattening for a 10th straight day hints at a bear‑flattening bias.
• Two‑year note auction size stays at $69 bn, but demand may wane under lower yields.
• Consumer confidence is rebounding, yet housing price gains are slowing.
• Mid‑term election politics could add another layer of volatility to rates.

You missed the warning sign when the Supreme Court struck down Trump’s emergency tariffs – and Treasury yields are reacting.

The Court’s decision last week wiped out a suite of emergency import levies that President Trump had imposed under a controversial declaration of a national emergency. While the ruling is a legal win for free‑trade advocates, the market’s immediate response was a modest uptick in Treasury yields, suggesting investors are already pricing in a shift back to a lower‑yield environment. Add to that the looming State of the Union address, where the President is expected to double‑down on trade policy, and the bond market is sitting on a knife‑edge.

Supreme Court Tariff Ruling and Treasury Yields

The 10‑year Treasury yield ticked up a single basis point to 4.037% after hitting its lowest level since late November on Monday. The 30‑year held near 4.687%, while the two‑year nudged higher to 3.461%, up 2.1 bps. The move may look modest, but in a market where yields have been hovering near historic lows, every basis point carries weight for portfolio duration and income expectations.

Institutional investors are reportedly “willing to go long Treasuries” because the removal of the tariff shock restores confidence in a more predictable monetary backdrop. In other words, the tariff reversal removes a source of inflation‑risk premium that had previously propped yields higher.

State of the Union: Trade Policy Signal

President Trump’s upcoming State of the Union is set to address the Supreme Court ruling directly. Analysts expect him to argue that the Court erred and to outline alternative statutory tools to re‑impose most of the struck‑down levies. If he succeeds in convincing Congress or the administration to pursue a different legal path, the market could see renewed risk premia, pushing yields back up.

Conversely, a softer tone—acknowledging the Court’s authority—could reinforce the current trajectory toward lower yields, bolstering Treasury demand and supporting the dollar.

Yield Curve Flattening: Bear‑Flattening Explained

The spread between two‑year and ten‑year yields narrowed to 57 basis points, marking the tenth consecutive day of flattening. This is a classic “bear flattening” pattern, where short‑term rates rise faster than long‑term rates. The market interprets it as a signal that the Federal Reserve may keep its current pause in rate cuts for longer, as it battles lingering inflation pressures.

Fed funds futures still price in roughly 56 bps of easing this year—equivalent to two 25‑bp cuts—though the first cut is not expected until July or September. The persistence of bear flattening suggests that investors are skeptical about an aggressive easing cycle, preferring to lock in higher short‑term yields while long‑term rates stay subdued.

Sector Impact: Real Estate and Consumer Confidence

Mixed economic data adds nuance to the bond narrative. Single‑family home price growth slowed to a 0.1% rise in December after a revised 0.7% increase in November, indicating a potential cooling in the housing market. On the other hand, consumer confidence surged to 91.2 in February—well above the 87.0 consensus—driven by an improved perception of the labor market.

For real‑estate investors, higher short‑term rates could pressure mortgage‑backed securities and refinance activity, while a stronger consumer confidence backdrop supports discretionary spending, benefiting equities in sectors like retail and services.

Historical Parallel: 2018 Tariff Shock

When the Trump administration first rolled out large‑scale tariffs in 2018, Treasury yields spiked as markets priced in higher inflation expectations and supply‑chain disruptions. Over the following year, yields retreated as the initial shock wore off and the Fed signaled a more dovish stance.

The current scenario mirrors that pattern: a legal shock followed by a rapid reassessment of risk. The key difference is the judicial origin of the shock, which could introduce a longer‑term uncertainty premium if courts continue to scrutinize executive trade actions.

Investor Playbook: Bull vs. Bear Cases

Bull Case: If the President adopts a measured approach and the Supreme Court’s decision holds firm, Treasury yields may continue to drift lower. In that environment, long‑duration bond funds and high‑quality corporate debt could see price appreciation. Investors might also consider “steepener” trades—buying short‑term notes while shorting longer tenors—to capture the flattening bias.

Bear Case: Should the administration find a legislative workaround or the Fed decide to pre‑emptively tighten to counteract any resurgence in inflation, yields could climb sharply. Short‑duration positions, floating‑rate notes, and Treasury Inflation‑Protected Securities (TIPS) would then become defensive staples.

Regardless of the direction, keep an eye on the two‑year auction scheduled for later today. A weak demand read‑through could foreshadow a short‑term yield spike, while a robust bid would reinforce the current flattening narrative.