US Supreme Court ruling overturning Trump nudges up stocks, could spook bond vigilantes

By Laura Matthews and Suzanne McGee

Feb 20 (Reuters) - The U.S. Supreme Court's Friday ruling striking down President Donald Trump's sweeping tariffs lifted stock prices a bit but could revive worries about government finances among so-called bond vigilantes, sparking a Treasury selloff that could push yields higher.

The decision could also dent risk appetite among those investors who expect Trump to seek other routes to re-impose the import duties. That could weigh on sectors with high foreign revenues or those sensitive to changes in the price of raw materials and components, investors said, citing tech, materials, energy, and industrials.

The court upheld a lower court's decision that the Republican president exceeded his authority under the 1977 law that he used to justify the duties. The government may now have to pay back $150 billion to $200 billion to U.S. and foreign companies that paid them. This could boost automakers, consumer goods importers and other sectors.

Stocks .SPX initially rose about 0.5% on the news, with retailers, other consumer cyclical stocks and ETFs with exposure to overseas markets enjoying the biggest gains, although some of those gains were pared in the following hour. Yields on the 10-year Treasury edged higher to 4.102%.

"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. And the key source of uncertainty is what the administration does in response," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

"What matters for the fixed income market is forward collections of tariffs."

Penn-Wharton Budget Model economists put the refund figure at around $175 billion, Reuters reported Friday. Still, trade experts believe that process will be legally fraught and refunds are by no means guaranteed.

The ruling also cast doubts over what forecasters said could be trillions of dollars of revenue over the next decade to service the $30 trillion pile of U.S. government debt. This adds to growing market unease over the size of the U.S. deficit, and could encourage bond vigilantes to punish government profligacy with a Treasury selloff that drives up yields.

"Fixed income yields jumped over concerns that the U.S. Treasury is now going to have to pay a significant amount back to U.S. corporations. This would lead to a higher deficit and a potential degradation in credit standards of the United States," said Phil Blancato, chief market strategist at Osaic, in New Jersey.

LIBERATION DAY ROUT

Trump's April 2 "Liberation Day" tariffs sparked a selloff in global stocks and U.S. Treasuries, and his erratic trade policies continued to cause turbulence across asset classes last year, including another major selloff in October.

An April bond market crash forced the administration to temper its plans, pausing some tariffs as it pursued new trade agreements and removing or reducing others after those pacts were struck. Thousands of companies around the world have filed lawsuits challenging their legality and seeking refunds.

A renewed spike in Treasury yields could create a "major headwind for markets," warned Eddie Ghabour, CEO of KEY Advisors Wealth Management.

Some investors, though, said the administration should be able to replicate the tariffs in time by leaning on other legal authorities, suggesting the long-term impact of Friday's ruling may be muted.

“I think the Trump administration has contingency plans in place," said Jeff Leschen, managing director at Bramshill Investments in Florida, adding investors needed time to digest the news. "I don’t expect there will be major revisions to the S&P targets for the year.”