The U.S. Treasury building in Washington, D.C., on Aug. 15, 2023.
Nathan Howard | Bloomberg | Getty Images
As if the bond rout in 2024 wasn’t bad enough, fixed income investors face multiple challenges in the year ahead, including one under-the-radar worry about short term notes coming due.
Nearly $3 trillion of U.S. debt is expected to hit maturity in 2025, much of it of a short-term nature that the Treasury Department has been issuing in large amounts over the past few years.
With the government expected to try to lengthen the duration of that debt when it is time to roll it over, it could provide another headache should the market not be prepared to absorb what already is expected to be massive Treasury issuance as the U.S. finances a nearly $2 trillion budget deficit.
“If you assume that we’re going to be running trillion-dollar-plus deficits beyond 2025 then eventually, cumulatively, that will overwhelm the T-bill issuance,” Tom Tzitzouris, head of fixed income at Strategas Research Partners said Tuesday on CNBC’s “Squawk Box.”
Strategas estimates that there is $2 trillion in “excess” Treasury bills in the $28.2 trillion Treasury market now.
“Those are going to have to gradually be scooped and tossed out to the five-to-10-year portion of the curve majority, and that is probably a bigger concern for the market right now than the deficit next year,” Tzitzouris said.
Normally, the Treasury Department likes to keep bill issuance to just over 20% of total debt. But that share has crept higher in recent years amid ongoing battles over the debt ceiling and budget and Treasury’s need to raise immediate cash to keep the government operating.
In 2024, Treasury issuance totaled $26.7 trillion through November, an increase of 28.5% from 2023, according to the Securities Industry and Financial Markets Association.
Treasury Secretary Janet Yellen faced criticism earlier this year from congressional Republicans and economist Nouriel Roubini, who charged that the department was issuing so many bills in an effort to keep near-term financing costs low and goose the economy during an election year. Scott Bessent, President-elect Donald Trump’s choice for Treasury secretary, also was among the critics.
However, yields have soared since late September, just after the Federal Reserve took the unusual step of lowering its benchmark borrowing rate by a half percentage point.
With yields and prices moving in opposite directions, it has made it a miserable year for the Treasury market. The iShares 20+ Year Treasury Bond ETF (TLT) lost more than 11% in 2024, compared with a 23% gain for the S&P 500.
With traders now pricing in a shallower path of rate cuts, and investors left to deal with an influx of issuance, it could be another challenging year for fixed income.
“The deficit next year should actually come down materially versus 2024,” Tzitzouris said. “So it’s scooping and tossing those bills that’s a bigger concern at this point in time.”