Bond traders pin hopes on Trump’s tariffs to support US finances

Bond traders are increasingly banking on revenue from President Donald Trump’s tariffs to bolster US public finances, marking a sharp reversal from earlier this year when his trade war triggered a severe sell-off in the Treasury market.

The president’s sweeping tariffs on trading partners sent global markets tumbling in April, raising fears of an economic shock and prompting Trump to suspend some of the levies. But investors are now counting on hundreds of billions of dollars raised by the remaining tariffs to offset his tax cuts and contain US borrowing, Financial Times writes.

“The only way I can see for the US government to reduce its outstanding debt in the near term is to use the tariff revenue,” said Andy Brenner, head of international fixed income at NatAlliance Securities, citing also revenues from chipmakers’ China sales. “If all of the sudden the tariff revenue will not be there, that is a problem.”

The non-partisan Congressional Budget Office (CBO) last month forecast that Trump’s tariffs could boost US government revenues by $4 trillion over the next decade, helping pay for tax cuts in the president’s One Big Beautiful Bill Act, which is projected to increase borrowing by $4.1 trillion over the same period.

The shift in market sentiment follows months of turmoil in Trump’s economic strategy, including his stop-start tariff war with trading partners such as China and repeated attacks on the U.S. Federal Reserve, which have unnerved investors. The president has used tariffs to pursue geopolitical aims and promote domestic re-industrialisation, while pledging to raise “trillions of dollars” in revenue from import taxes.

Doubts about those revenues resurfaced on August 29, when an appeals court upheld a US Court of International Trade ruling that Trump had exceeded his powers in imposing certain levies. The appellate court allowed the tariffs to remain in place while the White House seeks a Supreme Court review.

The ruling triggered a sell-off in US government bonds on September 2 and 3, as investors worried that lower tariff revenues could lead to a greater glut of Treasury issuance.

“If the bulk of Trump’s tariff programme is nullified by the courts some analysts will cheer, inflation will subside, growth may improve, and the Fed may be more inclined to ease monetary policy. But if the focus is on debt and deficits at that time, the bond market may riot,” said Thierry Wizman, a global rates strategist at Macquarie Group.

He added: “The risk that tariffs go away but the [One Big Beautiful Bill Act] stays may become the dominant risk for [US Treasuries] over the next few weeks.”

Credit rating agencies S&P and Fitch have signaled that tariff revenues were a factor in their decisions not to further downgrade the U.S. sovereign rating.

“There was a hope that tariff revenue can help control the budget deficit,” said Robert Tipp, head of global bonds at PGIM Fixed Income.

Global bond markets have steadied since the turmoil sparked by Trump’s “liberation day” tariff announcements in April. Yet sovereign debt remains under pressure as record borrowing by wealthy nations pushes up long-term interest costs.

Even with tariff revenues, some investors warn that US borrowing needs are daunting.

“If the tariffs were put on pause, it deprives Uncle Sam of a revenue source,” said Des Lawrence, senior investment strategist at State Street Investment Management. But he added that the “bigger negative picture” is the scale of government spending. Without tariff revenue, the CBO expects US debt relative to GDP to surpass its second world war peak by 2029.

“It’s helpful in plugging a gap, but there’s still a big issue in America spending much more than it’s receiving,” Lawrence said.

By Sabina Mammadli