Former PIMCO executives increase their "steepening yield curve" trades. Failure of Trump tariff case may increase supply of US bonds.

On Wednesday, former PIMCO executive and current Toronto hedge fund manager Ed Devlin is increasing his bets on steepening yield curve trades. He believes that if the Trump administration loses the tariff case, the United States will be forced to increase borrowing, thus raising the supply of long-term US bonds. The US Supreme Court is expected to issue a ruling on a challenge to President Trump's core trade policy on Wednesday at the earliest. Lower courts have already ruled that Trump's use of the International Emergency Economic Powers Act (IEEPA) for "equal tariffs" and the so-called "fentanyl tariffs" on China, Canada, and Mexico exceeded his presidential authority. Market participants point out that if the court rejects the above tariff basis, the US Treasury will face a significant shortfall. Data shows that the US budget deficit narrowed to $1.67 trillion last year, mainly due to increased tariff revenue, with related revenue reaching $264 billion. Trump and his officials have stated that if the IEEPA tariffs are overturned, they will seek other ways to tax imported goods. However, Devlin believes that given the approaching midterm elections, the tight legislative schedule, and the high sensitivity of voters to inflation and cost of living, alternative solutions politically deadlocked. Devlin said, "It's hard for him to fill this gap." Devlin left PIMCO in 2020 and founded Devlin Capital. "In our view, the market may underestimate the scale of US bond supply for a considerable period this year." Analysis suggests that if medium and long-term bond issuance increases, long-term yields often rise, or at least rise more slowly than short-term rates, thus driving the yield curve to steepen. In fact, in the first year of Trump's reelection, the curve has already steepened significantly: as of Wednesday morning, the spread between the 2-year and 10-year US Treasury bond yields has expanded to 64 basis points, significantly higher than the roughly 30 basis points level when he took office.