The U.S. Department of the Treasury building in Washington, D.C., August 15, 2023.
Nathan Howard | Bloomberg | Getty Images
As if losing bonds in 2024 wasn't bad enough, fixed-income investors face a number of challenges in the coming year, including one unseen concern about the maturity of short-term bonds.
Nearly $3 trillion of U.S. debt is expected to mature in 2025, most of it short-term and issued by the Treasury in large amounts over the past few years.
Since the government is expected to attempt to extend the term of this debt when it comes time to refinance it, it could create another headache if the market is not prepared to absorb what is already expected to be a massive issuance of Treasury bonds as the U.S. they finance almost the $2 trillion budget deficit.
“If we assume that after 2025 we will have a deficit exceeding trillions of dollars, the total will ultimately exceed the issuance of Treasury bills” – Tom Tzitzouris, director of fixed income at Strategas Research Partners he said Tuesday on CNBC “A box with a screech.”
Strategas estimates that there is currently a “surplus” of T-bills in the $28.2 trillion Treasury market.
“They will have to be gradually harvested and dumped into the bulk of a five- to 10-year curve, and that is probably a bigger concern for the market right now than the deficit next year,” Tzitzouris said.
Typically, the Treasury Department likes to keep note issuance at just over 20% of total debt. However, in recent years this share has increased due to ongoing changes fighting over the debt ceiling and budget and the treasury's need for immediate cash to keep the government running.
In 2024 Treasury issue According to the Securities Industry and Financial Markets Association, they amounted to $26.7 trillion in November, an increase of 28.5% compared to 2023.
Secretary of the Treasury Janet Yellen She faced criticism earlier this year from congressional Republicans and economist Nouriel Roubini, who accused the department of issuing so many bills to keep short-term financing costs low and weaken the economy in an election year. Scott Bessent, President-elect Donald Trump's choice for Treasury Secretary, was also among the critics.
However, yields have risen since late September, just after the Federal Reserve took the unusual step reducing the reference loan interest rate by half a percentage point.
With yields and prices moving in opposite directions, it was a terrible year for the Treasury bond market. The iShares 20+ Year Treasury Bond ETF (TLT) lost more than 11% in 2024 compared to 23% growth in the case S&P500.
With investors now pricing in a shallower path to interest rate cuts and investors having to deal with an influx of issuance, it could be another challenging year for fixed income.
“The deficit next year should actually fall significantly compared to 2024,” Tzitzouris said. “So this scraping and dumping of bills is a bigger problem at this point.”