On Wednesday, Ed Devlin, a former executive at Pacific Investment Management Co. (PIMCO) and current head of a Toronto-based hedge fund, is increasing his bets on a yield curve steepening trade. He believes that if the Trump administration loses the tariff case, the United States will be forced to increase borrowing, thereby pushing up the supply of long-term U.S. Treasury bonds. The U.S. Supreme Court could issue a ruling as early as Wednesday on a challenge targeting the core of former President Trump's trade policies. Lower courts have previously ruled that Trump's invocation of the International Emergency Economic Powers Act (IEEPA) to provide legal basis for "reciprocal tariffs" and the so-called "fentanyl tariffs" imposed on China, Canada, and Mexico exceeded presidential authority. Market participants point out that if the court invalidates the aforementioned tariff basis, the U.S. Treasury will face a significant funding gap. Data shows that the U.S. budget deficit narrowed to $1.67 trillion last year, primarily due to increased tariff revenue, which reached $264 billion. Trump and his officials have stated that if the IEEPA tariffs are overturned, they will seek other ways to tax imports. However, Devlin believes that with the midterm elections approaching, a tight legislative schedule, and voters being highly sensitive to inflation and the cost of living, alternative plans are politically difficult to advance. Devlin stated, "It will be very difficult for him to fill this gap." Devlin founded Devlin Capital after leaving PIMCO in 2020. "In our view, the market may be underestimating the scale of U.S. bond supply for a considerable period this year." Analysis suggests that if the issuance of medium- and long-term bonds increases, long-term yields tend to rise, or at least fall more slowly than short-term rates, thereby pushing the yield curve to steepen. In fact, the curve has already steepened significantly during the first year of Trump's return to office: as of Wednesday morning, the spread between the two-year and 10-year U.S. Treasury yields had widened to 64 basis points, significantly higher than the level of around 30 basis points at the time of his inauguration.
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