Courts, tariffs and a market that barely blinked
This week, markets quickly digested the news that the US Supreme Court struck down most of President Donald Trump’s tariffs. Markets hardly reacted, even though the court did not clarify whether importers are entitled to refunds for the tariffs paid. That question now moves to lower courts. Potential refunds could be as high as USD 170 billion, prompting immediate action from US companies.
Trump called the ruling a ‘disgrace’ and immediately announced a flat 10% levy on foreign goods, with plans to increase it to 15%. As expected, the administration will reroute trade measures through alternative legal channels. Many of these, however, require congressional approval, with deadlines falling just ahead of the midterm elections, which could be a political minefield.
Market reaction was telling. One could argue that the tariff uncertainty and the risk of massive refunds should have pushed US yields meaningfully higher. Instead, the 10-year Treasury yield rose only ~4 basis points. By Monday it had already retraced, ultimately moving lower as safe-haven demand picked up amid renewed ‘AI anxiety.’ This muted response underscores a key point: investors largely expected a workaround and had already priced in the legal setback. While USD High Yield spreads did widen during the week, the low magnitude signals there was no sign of panic in the market.
The trade impulse is also shifting in composition. Even at 15%, the new tariff structure would likely reduce the weighted-average US import tariff compared with earlier proposals. This particularly benefits major emerging market exporters like Brazil and China. It was also reflected in the outperformance of emerging market debt (EMD). This strengthens our conviction in an overweight to EMD, now with additional policy tailwinds.
On the macro front, the US Q4 GDP printed weak, though roughly 1% of the drag can be attributed to the prolonged government shutdown in Q4 2025. Excluding that distortion, the global backdrop remains constructive. Breakeven inflation eased as markets increasingly focus on potential productivity gains from AI, even as tariff headlines added uncertainty. Long-term interest rates fell a bit more than short-term rates, but the broader message remains: growth is resilient, and inflation risks appear balanced.
Bottom line for bond investors: stay selective on duration, but overweight sub-asset classes in fixed income with additional yield pickup such as EMD or investment-grade (IG) credit. We remain positive on EMD and are increasingly constructive on IG corporates. Lower geopolitical volatility in spreads and a still-meaningful yield pick-up can support outperformance in a world of improving macro momentum and less punitive US tariff impact.