Battered bond market enters 2025 facing some tough debt issues

As if the bond debacle of 2024 wasn’t enough, fixed-income investors will face a host of challenges next year, including an underappreciated concern about the onset of short-term bond maturities.

Nearly $3 trillion of U.S. debt, much of it short-term, is expected to mature in 2025, which the Treasury Department has issued in large volumes over the past few years.

The government is expected to try to extend the duration of that debt when it comes due, and that could be another headache if the market isn’t ready to absorb what is already expected to be massive Treasury issuance as the U.S. finances nearly a budget deficit. in 2 trillion dollars.

“If you assume that after 2025 we’re going to run a trillion-plus-dollar deficit, eventually, cumulatively, that’s going to outpace Treasury issuance,” said Tom Tsitsouris, head of fixed income at Strategas Research Partners. said Tuesday on CNBC”Casket”.

Strategas estimates that there are now $2 trillion of “excess” Treasuries in the $28.2 trillion Treasury market.

“They’re going to have to be gradually scooped up and thrown out on the five- to 10-year part of the majority curve, and that’s probably more of a concern for the market right now than the deficit next year,” Tsitsouris said.

Usually the Ministry of Finance wants the issue of bills to be a little more than 20% of the total debt. But this share has grown in recent years against the background of ongoing battles over the debt ceiling and the budget and the need for the Treasury to raise cash immediately to keep the government running.

In 2024 Treasury issue According to the Securities Industry and Financial Markets Association, by November it was $26.7 trillion, an increase of 28.5% compared to 2023.

Minister of Finance Janet Ellen Earlier this year, he faced criticism from congressional Republicans and economist Nouriel Roubini, who accused the department of issuing so many bills in an effort to keep short-term financing costs low and worsen the economy in an election year. Scott Besant, President Donald Trump’s pick for Treasury Secretary, was also among the critics.

However, yields have risen sharply since late September, just after the Federal Reserve took an unusual step reduction of the benchmark borrowing rate by half a percentage point.

With yields and prices moving in opposite directions, this has made this a miserable year for the Treasury market. The iShares 20+ Year Treasury Bond ETF (TLT) lost more than 11% in 2024. compared to an increase of 23%. S&P 500.

With traders currently pricing in a smaller rate cut path and investors left to contend with the influx of issuance, it could be another challenging year for fixed income.

“The deficit next year should be significantly reduced compared to 2024,” Tsitsouris said. “So the bigger concern at this point is the collection and scattering of these bills.”