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Treasury Trading Desks Brace for Tariff Legal Battle and U.S. Debt Plans

Nov 04, 2025 16:00:00 -0500 by Karishma Vanjani | #Treasuries

Consensus has been for the Treasury to keep its long-term bond offerings stable until at least next summer, but the pending Supreme Court ruling on tariffs now challenges this conviction. Above, the U.S. Department of Treasury, in Washington, DC. (Stefani Reynolds / AFP / Getty Images)

Key Points

Treasury traders are in for a high-stakes Wednesday as they closely watch both the Supreme Court’s arguments on tariffs and the government’s highly anticipated debt allocation announcement.

At 8:30 a.m. Eastern time on Wednesday, the Treasury Department will map out the mix of government debt to be issued, as questions linger about whether securities with lower duration will be reduced. At 10 a.m., the Supreme Court will hear arguments on the legality of President Donald Trump’s sweeping tariffs on products from virtually every U.S. trading partner. Traders will be under pressure to make a quick assessment of how these two powerful, yet distinct, events will influence the market.

Tariffs brought in $195 billion in the fiscal year ended September. It’s a small sum compared with the U.S.’s $38 trillion debt, but it helped trim the nation’s deficit. The lower deficits are, the more the U.S. is perceived as being able to pay back its debt. Prices of government bonds, which are up this year, to some degree reflect the benefit that tariffs offer deficits.

There’s only a 35% chance that Trump’s tariffs will survive, according to prediction markets. But the Supreme Court might take weeks to issue a decision, and “there may be informational content in the deliberations which could skew the perceived odds” for tariffs, says Barclays strategist Jonathan Hill.

The possibility that tariffs could be overruled forces bond traders to prepare for two scenarios simultaneously: A future in which deficits are a bigger problem for the bond market and a past in which deficits were in fact higher than understood, as tariff revenue may be returned in the form of a tax rebate to U.S. companies.

“If these tariffs are ruled illegal, the Treasury could face a daunting task of raising cash to refund collected tariffs while also financing a larger deficit over the medium term,” wrote Deutsche Bank strategist Steven Zeng. A senior official at Treasury said on Monday that, if tariff revenues were to go down, its estimate of borrowing could be affected.

Consensus has been for the Treasury to keep its long-term bond offerings stable until at least next summer, but the pending ruling on tariffs now challenges this conviction. The uncertainty on tariff revenue can give Treasury a reason to soften its outlook on debt on Wednesday, Zeng writes. Greater supply of longer-duration bonds could encourage investors to demand more yield, in turn lowering prices of existing bonds.

For the current quarter, the Treasury is expected to announce that it will issue $125 billion in bonds, which span across maturities of three, 10, and 30 years. This matches the sizes issued since 2024. By continuing to keep longer-term debt stable—and instead relying more on shorter-term debt—the government is making sure it keeps its thumb on 10-year yields.

The aggressive volume of short-term debt being issued is also fueling doubts about reductions in longer-term Treasury auction sizes, a question often posed to Wells Fargo’s Angelo Manolatos. A surprise reduction, in his view, would lead to the 10- to 30-yr yields falling by at least 0.1 percentage points, perhaps as much as 0.2 percentage points, within a day or two.

But Manolatos, like much of Wall Street, expects issuance to be stable.

The deficit is expected to exceed $2 trillion a year over the next decade, and that further makes the reduction in longer-term issuance an unlikely prospect.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.