NEW YORK – U.S. Treasuries rebounded on Monday after falling in pre-trade as investors pondered the impact of Friday’s Supreme Court decision to override President Donald Trump’s use of sweeping emergency powers.
The ruling brought new uncertainty to the bond market and increased volatility.
U.S. Treasuries fell sharply on Friday, as market participants turned away from the Treasury over concerns that the ruling’s expected fallout from the return of customs revenue to businesses would force the Treasury to make up the shortfall by issuing more bonds. This adds supply to a market that is already sensitive to deficit trends.
Friday’s sell-off in U.S. Treasuries sent the two-year Treasury yield by its biggest weekly rise in two-and-a-half months, reflecting expectations that short-term borrowing costs may remain high. The benchmark 10-year Treasury yield also rose on Friday, its biggest weekly gain in more than a month, highlighting a broader revaluation of term premiums.
That sell-off reversed on Monday, as investors generally shunned risk and picked up U.S. Treasuries on the back of renewed uncertainty over the direction of the administration’s trade policy. The shift highlighted how quickly sentiment can change as markets interpret the legal and policy situation surrounding tariffs.
“Friday’s decline was offset by today’s rally,” said Jim Burns, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.
“A lot of it has to do with investors trying to digest the tariff ruling, pinpointing what it means for future trade policy, and trying to better understand how it impacts U.S. Treasuries.”
The Trump administration has not provided tariff collection data since Dec. 14. But economists at the Penn Wharton Budget Model estimated Friday that the Trump administration’s tariff collection under the International Emergency Economic Powers Act would be more than $175 billion.
President Trump announced on Saturday that he would raise interim tariffs on all U.S. imports from 10% to 15%, the maximum level allowed by law.
In afternoon trading Monday, the yield on the U.S. 10-year Treasury note fell 5.6 basis points (bps) to 4.029%, after earlier hitting its lowest level since late November.
US 30-year bond yields also fell, dropping 2.8 bps to 4.697%.
At the front of the curve, the two-year bond yield, which reflects interest rate expectations, fell 4 basis points to 3.440%, down from an almost two-week low in early trading.
U.S. Treasuries were also hit with auctions amid tensions between the U.S. and Iran, analysts said.
The United States is making its largest military deployment in the Middle East, and President Trump warned on Thursday that “really bad things are going to happen” if there is no deal to resolve the long-standing dispute over Iran’s nuclear program. Iran has threatened to attack any US military bases in the region.
Elsewhere in the bond market, the yield curve flattened on Monday following the Supreme Court ruling and President Trump’s tariff plan to impose a 15% tariff on global imports to the United States.
The yield gap between 2-year and 10-year bonds narrowed to 53.60 basis points, the smallest difference since December 10th. It last traded at 58.7bp, flat for nine consecutive sessions compared to 60.3bp late on Friday.
This curve shows a bullish flattening movement where long-term yields fall faster than short-term yields, a pattern that typically indicates a flight-to-quality trade.
U.S. interest rate futures on Monday priced in nearly 60 basis points of easing this year, or about two cuts of 25 basis points each. This is up from about 55 basis points last Friday.
Meanwhile, U.S. Treasury yields slightly extended their decline after data showed U.S. factory orders fell 0.7% in December, but it was a deeper contraction than the 0.6% decline that Wall Street economists had expected. A sharp decline in commercial airline bookings weighed on the headline numbers.
However, orders in December increased by 3.7% compared to the same month last year. The report was delayed because last year’s government shutdown slowed gross domestic product growth in the fourth quarter.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski)
