On the Radar: The Supreme Court Just Struck Down Trump’s Tariffs. What Does It Mean For Canadian Mortgage Rates?

Capital Markets update
Feb 27, 2026

First National Financial LP

Key Takeaways:

The U.S. Supreme Court ruled 6–3 on February 20 that President Trump’s sweeping tariffs imposed under the International Emergency Economic Powers Act were unconstitutional, removing a significant source of inflationary pressure from the North American rate outlook and triggering a rally in government bonds on both sides of the border.
Government of Canada 10-year yields fell to a 12-week low near 3.2 percent and the 5-year yield dropped to roughly 2.73 percent, which are the maturities that anchor fixed mortgage pricing. If yields stay at or near these levels, fixed mortgage rates face downward pressure.
Tariff uncertainty is not over. The White House has already imposed a temporary 10 percent global tariff under a different legal authority that expires in 150 days, with plans to raise it to 15 percent, and is launching new investigations under Sections 232 and 301 that could produce durable tariffs later in 2026. The worst-case tariff scenario has been defused, but not eliminated.

What The Court Decided And Why It Matters For Rates

On February 20, the Supreme Court ruled that the International Emergency Economic Powers Act does not give the president the authority to impose tariffs. The decision was grounded in a straightforward constitutional point: the power to tax, including the power to levy tariffs, belongs to Congress under Article I, not to the president. The Court found that IEEPA’s grant of authority to “regulate importation” does not extend to imposing duties, and that no president had read it that way until now.

The ruling struck down the tariffs that had been the broadest and most economically disruptive of Trump’s trade measures: the “reciprocal” tariffs targeting most of America’s trading partners, and the separate levies on Canada, Mexico, and China tied to fentanyl enforcement. At their peak, tariffs on Canadian goods had reached 35 percent under the IEEPA orders. Those are now void.

For bond markets, the ruling matters because tariffs are inflationary. They raise the price of imported goods, push up input costs for businesses, and can feed through into broader consumer prices. Over the past year, tariff-driven price pressures had been one of the factors keeping inflation sticky in both the U.S. and Canada, and that stickiness had been a key reason the Federal Reserve and the Bank of Canada were reluctant to cut rates further. Removing a large share of those tariffs removes a source of upward pressure on inflation expectations, which in turn allows bond yields to fall.

The Bond Market Response Was Immediate

The reaction in government bond markets was swift. Government of Canada 10-year yields dropped to around 3.2 percent, their lowest level in roughly 12 weeks. The 5-year GoC yield fell to approximately 2.73 percent. On the U.S. side, 10-year Treasury yields also moved lower as traders adjusted to the reduced inflation risk.

The moves reflect two things happening at once. First, the removal of tariff-driven inflation pressure allows markets to price a lower path for future interest rates, which pulls yields down across the curve. Second, there is a safe-haven dynamic at work: the legal and policy uncertainty created by the ruling, the White House’s immediate pivot to replacement tariffs, and the prospect of new trade investigations all introduce enough uncertainty that some investors move into government bonds as a hedge.

The Replacement Tariffs And What They Mean

Within hours of the ruling, the White House moved to reimpose tariffs under different legal authority. The president signed an executive order invoking Section 122 of the Trade Act of 1974, which allows temporary tariffs of up to 15 percent to address balance-of-payments problems. A 10 percent global tariff took effect on February 24, and the administration has signaled it will raise the rate to 15 percent.

There are important differences between the IEEPA tariffs and the Section 122 replacement. The new tariffs have a hard expiration date of 150 days, which puts them at mid-July 2026 unless Congress votes to extend them. Given that both chambers of Congress have signaled opposition to the IEEPA tariffs, congressional extension appears unlikely. The new tariffs also exempt a wide range of products, including energy, critical minerals, certain agricultural goods, pharmaceuticals, and passenger vehicles. And the legal basis is already being questioned: Section 122 requires a genuine balance-of-payments crisis, which most economists do not believe currently exists.

The net effect, according to several economic analyses, is that the effective tariff rate under the new structure is roughly similar to or slightly lower than it was before the ruling. That means the near-term price impact may not change dramatically. But the duration and legal durability of the new tariffs are much weaker than the IEEPA regime they replaced, and that is what matters for the medium-term inflation outlook and, by extension, for the path of interest rates.

The administration is also launching new investigations under Sections 232 and 301 of the Trade Act, which could produce more durable, targeted tariffs on specific sectors later in 2026. These investigations take months to complete and typically result in narrower tariffs than the blanket IEEPA approach. For bond markets, the key distinction is between broad-based tariffs that raise overall inflation and sector-specific tariffs that create pockets of price pressure but have a smaller macro footprint.

The Bridge To Canadian Rates

The tariff ruling matters for Canadian mortgage rates through two channels. The first is the U.S. Treasury channel. When U.S. inflation expectations fall because a major source of tariff-driven price pressure has been removed, U.S. Treasury yields decline, and that pulls GoC yields lower alongside them. This is the gravitational relationship that has been a recurring theme in this series: Canadian 5-year and 10-year yields cannot move far from their U.S. counterparts for long without creating distortions in capital flows and currency markets.

The second channel is direct. Tariffs of up to 35 percent on Canadian goods had been raising costs for Canadian exporters and creating uncertainty that weighed on business investment and hiring. With those specific tariffs now struck down, the direct economic drag on Canada is reduced. That is positive for the Canadian economy, but it also means the Bank of Canada has less reason to cut rates on growth grounds. The replacement tariffs under Section 122 still apply to Canadian goods at 10 to 15 percent, but with significant exemptions and a mid-July expiration, the economic threat is materially smaller than what was in place a week ago.

The rate probability data reflects this environment. Markets are pricing a 96 percent chance the Bank of Canada holds at 2.25 percent at the March 28 meeting, and the Fed is at roughly 98 percent probability of no change on March 18. Neither central bank is expected to move in the near term. But the tariff ruling has shifted the medium-term outlook: if the replacement tariffs expire in July without renewal and the Section 232 and 301 investigations produce narrower measures, one of the key obstacles to lower rates in the second half of 2026 will have been removed.

What Could Push Yields Back Up

The risk to the “lower yields” thesis is that the tariff uncertainty does not actually resolve. The administration has made clear it intends to maintain and rebuild its tariff structure using alternative legal authorities. If Section 232 and 301 investigations produce broad tariffs that approach the economic scale of the IEEPA regime, the inflationary impact could return, and bond yields would reprice higher.

There is also the possibility that Congress acts to provide the president with explicit tariff authority, which would bypass the Court’s ruling entirely. While this appears unlikely given current legislative dynamics, the political landscape can shift, particularly as the 2026 midterm elections approach.

Consumer confidence data released this week offered a mixed signal. The Conference Board index edged up to 91.2 in February from 89.0 in January, but the Expectations Index has now been below 80 for 13 consecutive months, which the Conference Board associates with recession risk. U.S. factory orders fell 0.7 percent in December and durable goods orders declined 1.4 percent. The broader economic picture is one where the consumer is cautious, manufacturing is soft, and the labor market is stable but narrow. That backdrop is consistent with yields drifting lower, not higher, unless a new inflationary shock materializes.

Bottom Line

The Supreme Court’s ruling is the most significant development for the North American rate outlook in months. By striking down the IEEPA tariffs, the Court removed a major source of inflationary pressure that had been keeping bond yields elevated and limiting the scope for central bank easing. Government of Canada 5-year and 10-year yields have already moved lower in response, and if those moves hold, fixed mortgage rates will face downward pressure.

The tariff story is not over. Replacement tariffs are already in place, new investigations are underway, and the administration is searching for legal pathways to rebuild its trade barriers. But the worst-case scenario, blanket tariffs of 25 to 35 percent on Canadian goods under a broad and legally durable authority, has been taken off the table by the Court. What remains is a more limited, legally constrained, and time-bound tariff regime. For Canadian mortgage rates, that distinction matters. The floor under GoC yields that tariff-driven inflation had been supporting is now weaker, and the path to lower fixed rates, while still dependent on both the Fed and the Bank of Canada, is clearer than it was a week ago.

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