Reassessing the OBBBA Framework: U.S. Bond Strategy Amid Tariff Legal Uncertainty

The U.S. bond market is at a crossroads as legal challenges to President Trump’s tariffs create a ripple effect through fiscal policy, credit risk, and yield curve dynamics. At the heart of this recalibration lies the OBBBA (One Big Beautiful Bill Act) framework, a policy vehicle that has already triggered a surge in Treasury yields amid expectations of aggressive fiscal expansion. However, the recent appellate court ruling declaring most of Trump’s tariffs as an overreach of emergency powers has introduced a critical variable: uncertainty. This uncertainty is reshaping how investors interpret the OBBBA’s implications, particularly as Marko Papic of BCA Research warns that the bond market will act as a disciplining force on inflationary policies, including tariffs [4].

Legal Uncertainty and the Yield Curve

The federal appeals court’s decision to invalidate Trump’s use of the International Emergency Economic Powers Act (IEEPA) to justify tariffs has created a fiscal cliffhanger. If the Supreme Court upholds this ruling, the U.S. Treasury could face a $500 billion refund obligation, including accrued interest, compounding existing deficits and straining bond markets [3]. This scenario has already pushed 30-year Treasury yields to 4.92% in August 2025, as investors demand higher compensation for holding long-term debt amid heightened fiscal risk [2].

Papic’s OBBBA framework anticipates that rising bond yields will constrain Trump’s trade agenda, forcing a pivot from broad tariffs to targeted measures. He argues that the bond market’s reaction to inflationary policies—such as expansive trade wars—will act as a self-correcting mechanism, pushing the administration toward supply-side reforms instead [4]. This dynamic is evident in the yield curve’s steepening trend, as investors favor longer-duration bonds to hedge against potential fiscal shocks while short-term rates remain anchored by the Fed’s dovish stance [1].

Credit Risk and Investment-Grade Allocations

The legal limbo surrounding tariffs has also amplified credit risk across sectors. J.P. Morgan Global Research estimates that the average U.S. household now pays $1,300 annually in additional tariffs, reducing disposable income and increasing corporate cost pressures [4]. For investment-grade allocations, this translates to a shift toward defensive sectors such as utilities and pharmaceuticals, which are less sensitive to trade volatility [1]. Conversely, sectors like technology and consumer discretionary face elevated risks as global supply chains remain in flux.

Papic highlights that the leveraged credit market is already pricing in a “Tariff Trap” scenario, where retaliatory tariffs could trigger a U.S. recession and global growth slowdown. While high-yield spreads have narrowed post-announcement, reflecting investor optimism about targeted trade deals (e.g., Trump’s agreement with Vietnam), the underlying fundamentals remain fragile. Papic cautions that the market is “priced to perfection,” with high-quality credit spreads near historical tights and weaker credits trading at wider spreads due to caution [5].

Tactical Reallocation: A Call to Action

Given these dynamics, tactical bond reallocation is imperative. Papic’s strategy emphasizes three key adjustments:
1. Duration Extension: Investors should overweight long-duration Treasuries to capitalize on the steepening yield curve and hedge against inflationary pressures from potential fiscal stimulus [4].
2. Credit Selectivity: Prioritize investment-grade bonds in sectors with strong balance sheets (e.g., utilities, healthcare) while avoiding cyclical sectors exposed to trade volatility [1].
3. Curve Steepeners: Position for a steeper yield curve by combining long-dated Treasuries with short-term instruments, reflecting expectations of Fed rate cuts in 2025 as growth disappoints [4].

The legal challenges to tariffs are not merely a political issue but a structural catalyst for bond market strategy. As the Supreme Court weighs in on Trump’s emergency powers, investors must navigate a landscape where fiscal policy and legal outcomes are inextricably linked. Papic’s OBBBA framework provides a lens to interpret these shifts, but the urgency for tactical reallocation is clear: the bond market is already pricing in a future where tariffs may be curtailed, and fiscal discipline will reign.

**Source:[1] Marko Papic: Donald Trump will be disciplined by the bond market [https://themarket.ch/interview/marko-papic-donald-trump-will-be-disciplined-by-the-bond-market-ld.12529][2] 30-Year Treasury Bonds: A Strategic Hedge Against Tariff Volatility [https://www.ainvest.com/news/30-year-treasury-bonds-strategic-hedge-tariff-volatility-fiscal-uncertainty-2509-47/][3] Trump's Tariff Gamble Could Trigger a $500B Treasury Crisis [https://www.newsweek.com/trumps-tariff-gamble-could-trigger-500b-treasury-crisis-opinion-2123498][4] Marko Papic: Markets Misread Trump - Here's the Real Risk [https://wealthion.com/marko-papic-markets-misread-trump-heres-the-real-risk/][5] Evaluating Tariff Impacts on Leveraged Credit Earnings [https://www.guggenheiminvestments.com/institutional/perspectives/sector-views/high-yield-and-bank-loan-outlook-august-2025]