Fast reading
- Spreads tightened and equities edged higher following the ruling, while the US dollar strengthened.
- The yield on the 30-year US Treasury – which hit 5% last week – dipped this week as traders moderated rate cut expectations.
Investors have been absorbing a surprise US court ruling blocking the majority of President Donald Trump’s sweeping tariffs programme.
The three-judge US Court of International Trade ruled on Wednesday that Trump wrongfully invoked an emergency law to justify the policy.
The order largely applies to Trump’s 2 April ‘Liberation Day’ package, while tariffs imposed under different powers – such as the levies on steel, aluminium and automobiles – are unaffected. The White House has appealed against the decision.
Hong Kong’s Hang Seng Index closed up 1.35% on Thursday, while Japan’s Nikkei 225 rose 1.88%1.
The S&P 500 edged up 0.4% on Thursday following another set of blockbuster results this week from US computer chip giant Nvidia. Meanwhile, the US dollar – which has fallen more than 8% against the euro since the start of the year – strengthened; and the price of ‘safe haven’ gold dropped.
Figure 1: US dollar decline slowing?
“The administration invoked the International Emergency Economic Powers Act (1977) to justify implementing sweeping global import taxes. But it declared an ‘economic emergency’ when US GDP was growing, inflation was falling and unemployment was low. The court picked up on this,” says Mitch Reznick, Group Head of Fixed Income – London, Federated Hermes.
“The court ruling – that the president exceeded his authority – has led spreads tighter. The administration will try and appeal the ruling all the way to the Supreme Court, but it has introduced the possibility that the issue behind a lot of the market uncertainty might evaporate.”
Steepening yield curve
The impact of tariffs on growth – US GDP shrank by an 0.2% in the first quarter – coupled with last week’s debt downgrade and the Trump administration’s tax and spending bill has pushed up long-term borrowing costs. The yield on the 30-year US Treasury – which hit 5% last week2 – dipped following the court ruling as traders moderated their expectations for rate cuts by the US Federal Reserve.
“US Treasuries have been a busy economic barometer as of late. The net effect of all the tumult is that the average yield on the US Treasury index is about 20bps higher than where it stood the day before ‘Liberation Day’,” says RJ Gallo, Senior Portfolio Manager for Fixed Income at Federated Hermes.
Long-dated government bonds have become a pressure point where investor views on the market are being expressed, says Filippo Alloatti, Head of Financials (Credit) at Federated Hermes.
It’s quite tricky for investors to buy long-dated bonds at the moment
“The steepening of the yield curve is a global event. Across the US, UK and Japan you’re seeing increasing supply of government debt and weakening demand. All these countries have high and ever-increasing debt-to-GDP ratios and large deficits, especially in the US and the UK,” he says.
“It’s quite tricky for investors to buy long-dated bonds at the moment, particularly when you have policy uncertainty such as the so-called Mar-a-Lago Accord in the US and fiscal imbalances because of the White House’s chaotic trade policy implementation, which could potentially lead to higher inflation and a steeper yield curve,” Alloatti adds.
“We have curve steepeners in our portfolio because we think term premia will remain elevated [implemented via buying short-dated bond futures and selling longer-dated contracts]. We also like financials in our portfolios because they benefit from a steeper yield curve.”
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1 Bloomberg as at 29 May.
2 Bloomberg as at 29 May.
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