Fixed Income Investors Face Perfect Storm in 2025
As the bond market continues to struggle, fixed income investors are bracing themselves for a tumultuous year ahead. With nearly $3 trillion of U.S. debt set to mature in 2025, the Treasury Department’s plans to lengthen the duration of that debt could spell disaster for the market.
A Tsunami of Short-Term Notes
The majority of the maturing debt is short-term in nature, which the Treasury Department has been issuing in large quantities over the past few years. This has led to a buildup of “excess” Treasury bills in the $28.2 trillion Treasury market, estimated to be around $2 trillion. As these bills come due, they will need to be rolled over into longer-term debt, putting pressure on the market to absorb the massive issuance.
A Bigger Concern than the Deficit
According to Tom Tzitzouris, head of fixed income at Strategas Research Partners, the real concern is not the deficit itself, but rather the impact of rolling over these short-term notes. “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.
Treasury’s Dilemma
The Treasury Department typically aims to keep bill issuance to around 20% of total debt. However, this share has increased in recent years due to ongoing battles over the debt ceiling and budget, as well as the need to raise immediate cash to keep the government operating. This has led to criticism from congressional Republicans and economists, who argue that the department is issuing too many bills to keep near-term financing costs low and boost the economy.
A Miserable Year for the Treasury Market
The Treasury market has had a dismal year, with yields soaring since late September. The iShares 20+ Year Treasury Bond ETF (TLT) lost over 11% in 2024, compared to a 23% gain for the S&P 500. With traders now pricing in a shallower path of rate cuts, and investors facing an influx of issuance, it could be another challenging year for fixed income.
A Glimmer of Hope
Despite the challenges ahead, there is some good news. The deficit is expected to decrease materially in 2025 compared to 2024. However, as Tzitzouris notes, “it’s scooping and tossing those bills that’s a bigger concern at this point in time.” As the market navigates this perfect storm, fixed income investors will need to be vigilant and adaptable to navigate the treacherous waters ahead.
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