Treasuries: Tariff Turmoil Sends Investors Rushing to Bonds as Supreme Court Strikes Down Trade Levies

Treasury yields have fallen across the entire curve over the past two weeks, with the long end leading the way. The 30-year bond dropped from 4.91% on February 4 to 4.70% on February 19 — a decline of 21 basis points that signals growing conviction in the disinflationary trajectory. The benchmark 10-year note followed a similar path, sliding from 4.29% to 4.08%, while the 2-year fell from 3.57% to 3.47%.

The 10-year to 2-year spread has narrowed to 60 basis points as of February 20, down from 74 basis points in early February. This flattening is noteworthy — while the curve remains positively sloped (a healthy sign after years of inversion), the compression suggests that the long end is pricing in less inflation and growth than the short end is pricing in Fed cuts.

Treasury.gov data shows the average interest rate on total marketable government debt at 3.348% as of January 31, 2026, with Treasury Bills at 3.760%, Notes at 3.169%, and Bonds at 3.369%. The weighted average interest rate across all interest-bearing debt stands at 3.316%, reflecting the cumulative effect of higher-coupon issuance over the past two years of elevated rates.

The Supreme Court's decision to strike down Trump's reciprocal tariff framework represents a major inflection point for Treasury investors. Reciprocal tariffs — some exceeding 50% on imports from key trading partners — had been a persistent upward risk to inflation since their implementation. Their removal should, in theory, reduce consumer prices and ease pressure on the Federal Reserve to maintain restrictive policy.

But the market's relief was short-lived. Within hours of the ruling, Trump announced plans to raise baseline global tariffs to 15%, attempting to reassert trade leverage through a different legal mechanism. For bond investors, this creates an uncomfortable ambiguity: the net inflationary impact depends entirely on whether a 15% uniform tariff is more or less disruptive than the patchwork of reciprocal rates it would replace.

Retailers and manufacturers have signaled cautious optimism about the ruling. The retail industry views the Supreme Court decision as a win despite lingering uncertainty, while small furniture retailers continue to face existential threats from remaining tariff structures. Uncertainty persists for UK firms as the global trade order is reshaped. For Treasury holders, the key question is whether the policy whiplash keeps a risk premium embedded in longer-dated bonds or whether the market ultimately prices in a less inflationary trade regime.

The Federal Reserve has cut the federal funds rate four times since September 2025, bringing the effective rate from 4.33% to 3.64% in January 2026. This represents a cumulative 69 basis points of easing, yet the pace has been measured — the Fed has delivered 25 basis point cuts at consecutive meetings rather than the larger moves some had anticipated.

The tariff ruling complicates the Fed's calculus in both directions. If the removal of reciprocal tariffs proves disinflationary, it gives the FOMC more room to continue cutting. But if Trump's proposed 15% global tariff reignites price pressures, the Fed may need to pause or slow its easing cycle. The 2-year yield at 3.47% — well below the current Fed funds rate — suggests the market expects at least one more cut in the near term, and possibly two by mid-year.

CPI data reinforces the gradual cooling narrative. The Consumer Price Index rose to 326.588 in January 2026 from 326.031 in December 2025, a month-over-month increase of approximately 0.17%. While still above the Fed's 2% annualized target, the trajectory has been downward since mid-2025, giving policymakers confidence that their rate cuts are not reigniting inflation.

The fiscal backdrop remains a critical consideration for Treasury investors. The US government's total interest-bearing debt carries an average rate of 3.316%, and as older, lower-coupon securities mature and are replaced with new issuance at today's rates, the effective cost of servicing the national debt continues to climb. Treasury Bills, with an average rate of 3.760%, represent the most expensive segment of the marketable debt stack on a current-rate basis.

The silver lining is that the recent decline in yields has modestly reduced the government's prospective borrowing costs. A 10-year note auctioned at 4.08% today is significantly cheaper than one sold at 4.70% last autumn. If the yield decline holds, the Treasury Department's quarterly refunding announcements through the first half of 2026 will benefit from lower coupon rates on new issuance.

Treasury Inflation-Protected Securities (TIPS) carry an average real yield of 0.983%, implying breakeven inflation expectations of roughly 3.1% when compared to the nominal 10-year yield of 4.08%. This breakeven rate has compressed from elevated levels, consistent with the market's interpretation that the tariff ruling is net disinflationary — though Trump's 15% tariff proposal keeps the breakeven from falling further.

For Treasury investors, the current environment presents both opportunity and risk. The opportunity lies in the yield itself: a 10-year note at 4.08% offers a real return above 1% even under current inflation readings, and if inflation continues to moderate, total returns from duration could be substantial. The 30-year bond at 4.70% offers even more income for investors willing to accept the volatility.

The risk, however, is that trade policy remains the dominant wildcard. The Supreme Court ruling eliminated one source of uncertainty, but Trump's response has introduced another. If a 15% global tariff survives legal challenges and takes effect, it could push inflation expectations higher and reverse the recent yield decline. Conversely, if the tariff proposal is blocked or negotiated down, the rally in Treasuries could accelerate.

The narrowing yield curve spread — from 74 basis points to 60 over just two weeks — deserves close attention. A rapidly flattening curve historically signals that the bond market is downgrading its growth expectations. If the spread compresses further toward zero, it could be an early warning that the trade policy disruption is weighing on economic momentum more than current GDP data reflects. For now, the positive slope suggests recession risk remains low, but the trajectory warrants monitoring.