Supreme Court Could Blow Up Your 60/40 Portfolio By December — Here's How To Hedge

Wall Street repriced a $500 billion event in a single day, and most retail investors completely missed it.

When the Supreme Court questioned Trump administration lawyers about tariff legality on November 5th, something strange happened in financial markets. Treasury bond yields (the interest rate the government pays to borrow money) spiked to their highest level in a month. At the same time, prediction markets where traders bet real money crashed from 50% odds that Trump’s tariffs would survive to just 30% by day’s end.

But this part should make every investor pay attention: Hedge funds have been buying up hundreds of millions of dollars in tariff refund claims from struggling importers, paying just 20 to 40 cents for every dollar the government might owe back.

More than just speculation, this is smart money making a calculated bet with real capital. The implications for your portfolio, your mortgage rate, and your monthly grocery bill are bigger than you might think.

Markets Fear Trump Losing, Not Winning

In reality, markets aren’t worried that Trump might win his tariff case at the Supreme Court. They’re worried he might lose it.

Think about it like this: Imagine your employer suddenly announced they might have to refund half of everyone’s paychecks from the past year, with interest. Where would that money come from? They’d have to borrow it, and fast.

That’s the situation facing the U.S. Treasury. Since April 2025, the government has collected roughly $89 billion specifically from Trump’s tariffs imposed under emergency powers. If the Supreme Court rules these tariffs were illegal, every penny has to be refunded with interest calculated from the day each payment was made.

By the time a Supreme Court decision comes down (likely before the end of 2025 or early 2026), that bill could exceed $500 billion when you include interest compounding at current Treasury rates of about 5-6% annually.

How Hedge Funds Are Profiting

This is where it gets interesting for regular investors trying to understand what the smart money is doing.

Companies that import goods (a furniture retailer bringing in sofas from Vietnam or an electronics distributor shipping tablets from China) have been paying these tariffs for months. Many of these businesses are cash-strapped. They need money today, not in 12-24 months when the government might issue refunds.

Enter the hedge funds. Firms like Jefferies Financial Group and Oppenheimer & Co. are acting as brokers in a brand new market: tariff refund claims. They connect hedge funds willing to pay immediate cash with importers who need money now.

The math works like this: If an importer paid $1 million in tariffs and the Supreme Court strikes them down, the government owes that $1 million back plus interest. Let’s say $1.05 million after a year. A hedge fund might offer the importer $400,000 today (40 cents on the dollar). The importer gets immediate cash to cover operating expenses. The hedge fund waits for the government refund and pockets the difference: $650,000 profit on a $400,000 investment.

Wall Street is willing to deploy real capital into these trades in the $2 million to $20 million range. That tells you how seriously they’re taking the possibility of tariff invalidation.

Why Your “Safe” Bonds Aren’t Acting Safe Anymore

This story connects directly to your portfolio.

Most investors learned a simple rule: When the stock market gets scary, bonds provide safety. That’s why financial advisors love the 60/40 portfolio (60% stocks for growth, 40% bonds for stability).

But something unusual is happening right now, and it has everything to do with this tariff case.

Normally, when markets expect bad economic news, Treasury bond prices rise and yields fall because investors rush to the safety of U.S. government debt. It’s called a flight to safety.

But in this tariff situation, the opposite is happening. Treasury yields are rising (which means bond prices are falling) even though the expected outcome (tariff removal) should be good for the economy.

Why? Because investors are looking past the initial positive effects and seeing a fiscal nightmare.

If the Supreme Court invalidates the tariffs, the government loses about $89-150 billion per year in revenue going forward, while simultaneously owing $500+ billion in refunds from past collections. That’s a double punch to the federal budget.

To cover this unexpected hole, the Treasury Department has to borrow more money by issuing more bonds. When the supply of bonds increases faster than demand, bond prices fall and yields (interest rates) rise. Basic supply and demand.

Think of it like a company announcing a massive secondary stock offering: If Apple suddenly announced it’s issuing 500 million new shares to raise emergency cash, the current share price would drop (because there are far more shares available than buyers willing to buy them at the current price). The same principle applies when the Treasury floods the bond market.

The Hidden Foreign Investor Angle

There’s yet this missing detail, but it explains a lot about why this is happening now: Japanese investors have been big sellers of U.S. Treasury bonds in recent months.

In April alone, overseas investors (primarily from Japan) sold about $46.8 billion in long-dated Treasury bonds. Why does this matter?

Japanese investors have been borrowing money in yen (where interest rates are near zero) and investing it in higher-yielding U.S. Treasuries to pocket the difference. It’s called a carry trade. But tariff uncertainty creates risk: If trade tensions escalate or currency markets get volatile, these investors need to sell their Treasury holdings quickly to repay their yen loans.

When large foreign investors pull back from buying U.S. bonds, the Treasury has to offer higher interest rates (yields) to attract new buyers. That’s another reason yields have been climbing.

What This Means for Your Real Life

Let me make this concrete with how it affects your actual finances:

• Your grocery bill: If tariffs are struck down, import costs fall, and eventually prices at Walmart, Target, and your local grocery store should come down. This is the good news.
• Your 401(k): Your stock holdings (especially if you own companies that rely on imports like retailers, tech companies, manufacturers) could see a rally as their costs decrease. But your bond holdings will likely fall in value as yields rise. The traditional bonds-protect-you-when-stocks-fall rule might not work this time.
• Your mortgage rate: Treasury yields spike because the government needs to borrow $500 billion unexpectedly, mortgage rates could rise even though the underlying economy is doing okay. If you’re planning to buy a house or refinance, this is the dynamic to watch. Mortgage rates tend to follow the 10-year Treasury yield.
• Your “safe” bond fund: If you own bond mutual funds or bond ETFs in your retirement account, understand that they’re acting more like risk assets right now, not safe havens. When yields rise, existing bond prices fall. A 1% rise in yields can cause a 7-10% drop in long-term bond prices.

The Winners and Losers

If the Supreme Court invalidates Trump’s tariffs:

Winners:

• Import-heavy retailers like Walmart, Target, Home Depot
• Tech companies with complex supply chains like Apple and Dell
• Consumers paying lower prices
• Domestic manufacturers that use imported components

Losers:

• U.S. steel and aluminum producers who benefited from tariff protection
• Treasury bond holders as bond prices fall
• The federal government’s fiscal position
• Anyone planning to refinance their mortgage in the next 6-12 months

What You Can Actually Do About This

You probably can’t access those hedge fund tariff refund trades at 20-40 cents on the dollar. Those $2-20 million deals are brokered by Jefferies and Oppenheimer to institutional money.

But you have real options.

If You Think Tariffs Get Struck Down

Certain stocks get an immediate boost when tariffs fall: Walmart, Target, Home Depot, Best Buy, Amazon. Any retailer or tech company heavy on imports.

The play: Add shares of retail-heavy ETFs like XRT (Retail ETF) (NYSE:XRT) or consumer discretionary ETFs like XLY (NYSE:XLY) over the next few weeks. When the Supreme Court rules and tariffs fall, these stocks should pop. XLY carries a 0.10% expense ratio, XRT charges 0.39%.

The risk: If the Supreme Court upholds tariffs, you’re holding positions that sell off. Size accordingly.

If You Own Bond Funds

Remember how bond prices fall when yields rise? If you own bond mutual funds or bond ETFs, long-term Treasury bonds could decline 7-10% if yields climb further.

Two ways to protect yourself:

Move to short-duration Treasury ETFs like SHV (iShares Short Treasury Bond ETF), which holds only bonds maturing in less than one year. SHV has near-zero duration risk, meaning it barely moves when long-term yields spike. Currently yielding 4.29% with a 0.15% expense ratio.

For more aggressive protection, buy an inverse long-term Treasury ETF like PST (Inverse Long-Term Treasury ETF), which gains value when long-term Treasury yields rise and bond prices fall. The math: If you own $100,000 in long-term Treasury bonds and buy $20,000 of PST, a 1% yield increase that would normally hurt your bonds by $7,000 gets partially offset by PST gains. But inverse ETFs lose money when yields fall. This is a tactical hedge, not a buy-and-hold position. Exit it once the Supreme Court rules. PST charges 0.50%.

If You’re Planning to Buy a House or Refinance

Mortgage rates track the 10-year Treasury yield closely. If yields are rising due to tariff uncertainty, and the Supreme Court rules to invalidate tariffs, Treasury yields could fall as the fiscal panic subsides. That could mean lower mortgage rates in late 2025 or early 2026.

Wait for the Supreme Court decision before locking in a rate. If tariffs get struck down and yields fall, your mortgage rate could be 0.25-0.50% lower. On a $400,000 mortgage, a 0.25% rate difference saves roughly $60,000 over the life of the loan.

If You Have a 401(k) With Bond Allocation

If you own intermediate or long-term bond funds in your retirement account (AGG, BND, or your fund’s bond allocation), consider rotating into short-duration bond funds like SHV before the Supreme Court ruling.

You keep your fixed income allocation, but you sidestep the duration risk (the risk that bond prices fall as yields rise). Once the ruling drops and yields stabilize, rotate back to longer-duration bonds for better returns. You’re reducing unnecessary risk during a specific known event.

What Investors Should Watch

The Supreme Court hasn’t announced when it will rule, but based on prediction markets and legal analysts, expect a decision before year-end 2025 or early 2026.

Your early warning system: Watch the 10-year Treasury yield. If it keeps climbing above 4.5% despite expectations that tariffs might fall, it means markets are pricing in bigger fiscal problems ahead. That’s the signal that the bond market is starting to worry about America’s ability to manage its debt load (a phenomenon old Wall Street hands call bond vigilantes enforcing fiscal discipline).

Trump imposed tariffs claiming they would strengthen America’s financial position. If the Supreme Court strikes them down, the fiscal fallout could be one of the biggest unplanned government expenses in modern history. According to the Committee for a Responsible Federal Budget, the government collected $195 billion in tariff revenue in fiscal year 2025. Your portfolio will feel it whether you’re paying attention or not. Wall Street already is.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.