The troubled bond market faces some difficult debt issues as we enter 2025


The U.S. Treasury Department building in Washington, DC, on August 15, 2023.

Nathan Howard | Bloomberg | Getty Images

As if the bond crisis of 2024 wasn’t bad enough, fixed income investors face several challenges in the coming year, including an under-the-radar concern over short-term bond maturity.

Nearly $3 trillion in U.S. debt is expected to come due in 2025, much of it short-term in nature and the Treasury has spent large amounts in recent years.

Since the government is expected to try to extend the maturity of this debt when the time comes to extend it, this could cause further headaches if the market is not ready to absorb the already expected massive government bond issuances as the US financing is almost at an end with a budget deficit of $2 trillion.

“If you assume that we’re going to have deficits of more than $1 trillion beyond 2025, then that will ultimately overwhelm Treasury issuance overall,” said Tom Tzitzouris, head of fixed income at Strategas Research Partners, on Tuesday on CNBC “Squawk Box.”

Strategas estimates that there is currently $2 trillion worth of “excess” Treasury bonds in the $28.2 trillion Treasury bond market.

“These need to be gradually tapped and distributed to the five- to 10-year part of the yield curve, and that is probably more of a concern to the market right now than the deficit next year,” Tzitzouris said.

Typically, the Treasury likes to keep the issuance of bills at just over 20% of total debt. However, that share has increased in recent years due to ongoing debt ceiling and budget struggles and the Treasury Department’s need to immediately raise cash to keep government operating.

Treasury issuance in 2024 totaled $26.7 trillion through November, up 28.5% from 2023, according to the Securities Industry and Financial Markets Association.

Treasury Secretary Janet Yellen was criticized earlier this year by congressional Republicans and economist Nouriel Roubini, who accused the department of issuing so many bills to keep short-term financing costs low and stimulate the economy in an election year. Scott Bessent, President-elect Donald Trump’s choice as Treasury secretary, was also among the critics.

However, yields have been rising since late September, shortly after the Federal Reserve took the unusual step of cutting its key interest rate by half a percentage point.

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

With traders now pricing in a flatter path to rate cuts and investors facing an influx of issuance, it could be another challenging year for fixed income.

“Next year’s deficit should actually fall significantly compared to 2024,” Tzitzouris said. “That’s why the bigger problem at this point is collecting these notes and throwing them away.”

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