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

Core Viewpoint - Treasury traders are preparing for significant market movements due to the upcoming Supreme Court ruling on tariffs and the government's debt allocation announcement, which could impact bond markets and deficit financing [2][3][7]. Treasury Debt and Tariffs - The Treasury Department is expected to announce a bond issuance of $125 billion, maintaining stability in long-term offerings while relying more on short-term debt [11]. - Tariffs generated $195 billion in revenue for the fiscal year ending September, contributing to a reduction in the national deficit, which is crucial for perceptions of the U.S.'s ability to repay its $38 trillion debt [4][8]. - There is a 35% chance that the tariffs will be upheld, but the Supreme Court's decision may take weeks, creating uncertainty in the market [5][10]. Market Reactions and Predictions - If tariffs are ruled illegal, the Treasury may need to refund the $195 billion collected, complicating deficit financing and potentially leading to higher borrowing needs [8][10]. - A surprise reduction in longer-term Treasury auction sizes could lead to a decrease in yields for 10- to 30-year bonds by 0.1 to 0.2 percentage points [7][12]. - The expectation is that the deficit will exceed $2 trillion annually over the next decade, making reductions in longer-term issuance unlikely [12].