TREASURIES-US yields climb as Supreme Court strikes down Trump tariffs

By Karen Brettell

NEW YORK, Feb 20 (Reuters) - U.S. Treasury yields rose on Friday after the U.S. Supreme Court struck down President Donald Trump's tariffs enacted under a law meant for use in national emergencies, leading to uncertainty over payments that may now be due to trading partners and future federal government revenues.

Trump responded by saying that he would impose a 10% global tariff for 150 days to replace some of his emergency duties.

"We have alternatives, great alternatives" Trump said. "Could be more money. We'll take in more money and we'll be a lot stronger for it," Trump said of the alternative tools.

The justices, in a 6-3 ruling authored by conservative Chief Justice John Roberts, upheld a lower court's decision that Trump's use of the 1977 law exceeded his authority.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 1.5 basis points to 4.09%, from 4.075% late on Thursday.

“The big question for everyone is what exactly happens to refunds and whether this means the government has to refund the tariff revenue and how quickly that happens,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

Trump said that it was not clear if or when there would be any refunds, adding that the matter could take years to litigate.

A MUDDY REFUND OUTLOOK

Trump's April 2 "Liberation Day" tariffs included a baseline tariff of 10% on all imports to the United States and specific additional 15% to 50% tariffs on most countries, many of which were renegotiated and lowered subsequently.

Thousands of companies around the world have filed lawsuits challenging those sweeping tariffs and sought refunds on duties paid.

"The negative of it is what happens with the money that's already been paid. And the fact that this administration has counted on tariffs as a budget balancing technique is going to create some chaos and require a rethinking on the part of the administration," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.

Trump's administration has not provided tariff collection data since December 14. But Penn-Wharton Budget Model economists estimated on Friday that the amount collected in Trump's tariffs based on the emergency economic powers act stood at more than $175 billion.

"The bond market faces the biggest concern," said Gene Goldman, chief investment officer at Cetera Investment Management in El Segundo, California.

If the Treasury is forced to refund tariffs, Treasury issuance may need to rise dramatically, given that the revenues have helped to finance fiscal stimulus, Goldman said.

REPLACING THE REVENUES

A major focus for Treasury market participants will be whether Trump is able to match the current tariff revenues with alternative levies, which will be key for the U.S. fiscal outlook.

“What matters for the fixed-income market is forward collections of tariffs, even if there is a one-time refund that has to occur because of the decision,” said TD's Goldberg.

U.S. Treasury Secretary Scott Bessent said on Friday that the Treasury Department's estimates show that the use of alternative legal authorities for tariffs will result in "virtually unchanged" tariff revenue in 2026.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 1.4 basis points to 3.484%. The yield curve between two- and 10-year notes US2US10=TWEB was little changed on the day at 62 basis points.

DATA IMPACT

Yields also rose after data earlier on Friday showed that underlying U.S. inflation increased more than expected in December, boosting expectations that the Federal Reserve will keep interest rates on hold for the next several months.

Both the headline and core personal consumption expenditures price index rose by 0.4% during the month, above economists' expectations of a 0.3% increase in each index.

Separately, U.S. economic growth slowed more than expected in the fourth quarter amid disruptions from last year's government shutdown and a moderation in consumer spending.

Traders are also focused on rising tensions between the United States and Iran.

U.S. military planning on Iran has reached an advanced stage with options including targeting individuals as part of an attack and even pursuing regime change in Tehran, if ordered by Trump, two U.S. officials told Reuters.