Tariffs have been an extremely lucrative money spinner for the US government, which has really struggled to raise revenue (relative to GDP) in recent years.
Wharton Business School estimates that the US government has received about $225bn from tariffs and associated taxes so far in 2025. That compares with about $80bn in the same period of 2024.
This extra cash has kept the US government’s fiscal deficit from completely blowing out. If that goes away, it will undermine one of the supports keeping US government yields relatively low.
The argument against US president Donald Trump’s tariffs has been known since he unveiled them back in April: the US Constitution says taxes are the remit of Congress alone, and tariffs are taxes.
Up until recently it looked like a 50/50 call whether the Supreme Court would rule the tariffs illegal
The Supreme Court is currently hearing arguments as the final word on the matter and is expected to give its ruling by January (although it could be as late as June).
According to prediction markets and pundits, up until recently it looked like a 50/50 call whether the court would rule the tariffs illegal. After the first day of arguments, that soared to more than 70%.
The Trump tariff rebate?
If the Supreme Court does knock back Trump’s tariffs, it would significantly reduce the level and breadth of tariffs that Trump can impose.
There are other avenues for Trump to impose tariffs, but they are not as arbitrary, and the main one has a ceiling of 15% (well below the level he has set for many nations) and a limit of 150 days (it’s been more than 210 days since ‘Liberation Day’ when the tariffs were imposed).
Meanwhile, if the government has been found to have illegally taxed Americans for the better part of a year, will the government have to pay it back? Refunding the importers should be easy enough (they presumably had to pay the tariffs through a central system), but in terms of legal process and administration it will no doubt be a nightmare.
If the government has been found to have illegally taxed Americans, will the government have to pay it back?
And how would the US bond market react to a cheque-drop worth $100bn or so? Last year’s average monthly net issuance of US government bonds was $155bn. And the reduced tax income would push ongoing US borrowing needs higher still. It would also reignite tariff uncertainty just at a point when it was starting to settle down.
Despite this risk, US government bond yields have held up well.
At roughly 4.10%, the 10-year yield is trading at the low end of the range its held since mid-2023. That yield is still almost a half-percentage-point lower than where it was in the summer. So bond investors don’t seem concerned about a fiscal shock coming down the pipe.
The main influence taking up attention is the path of US Federal Reserve interest rates: the expectation is that a slowing economy and receding inflation will allow several cuts to the benchmark interest rate in coming months.
While short-term central bank rate cuts don’t have a direct effect on longer-term bond yields, it should still push the yield down, all else equal.
Trump’s tariffs could make investors start to ‘look elsewhere for opportunities’
Concerns about the state of the US finances – with or without a court-enforced tariff refund – had pushed us to diversify our bond holdings earlier this year. We reduced our US government bonds as those yields fell, and bought government debt in Europe and the Pacific instead.
Falling US government bond yields, a continued drop in the oil price and the S&P 500 on track for a fourth-straight quarter of double-digit profit increases helped bump up valuations. The S&P 500 is on a forward PE of 23x, the highest in five years.
Much of this rise in the average value of companies is the astonishing success of the big tech companies at the top of the US stock market that are forging ahead with AI tools and infrastructure. Most of them are expanding profits at a hefty clip and are spending big on their plans to grow even faster.
While we own many of these US companies, we felt it made sense to reduce the market risk of our equities somewhat and ensure we’re well diversified.
Concerns about the state of the US finances had pushed us to diversify our bond holdings earlier this year
To that end, we bought a new structured product during the month. The Morgan Stanley Swiss Market Index Call Spread pays us 356% of the first 50% returned by the index over the next five years.
The downside is that if the market is flat we get no return bar our initial investment. And if the market falls by more than 35% then we lose capital in line with the market.
The mood music for Swiss equities is a bit depressed at the moment because of the trade tariffs implemented by Trump, yet almost half of the Swiss Market Index’s (SMI) market cap is made up of three very defensive names: food maker Nestle, and pharmaceuticals Novartis and Roche (which we own directly as well).
The SMI trades on a PE of just 16x, yet still sports high-quality businesses. We think this makes for an attractive trade.
Will McIntosh-Whyte is Rathbone Multi-Asset Portfolios fund manager at Rathbones
