The bond market in 2025 will face challenges related to debt.

• In 2025, approximately $2.9 trillion of U.S. debt will mature, most of which is short-term.
• If the market is not ready to absorb the expected massive Treasury issuance due to the U.S.'s nearly $2 trillion budget deficit, it could lead to another headache.

In addition to the bond rout in 2024, fixed income investors will face several challenges in the upcoming year, including a potential concern about short term notes coming due.

In 2025, approximately $2.9 trillion of U.S. debt will mature, with a significant portion being short-term debt that the Treasury Department has been issuing in large quantities recently.

If the government tries to extend the duration of the debt when it is time to roll it over, it could create another problem should the market not be ready to absorb the expected massive Treasury issuance as the U.S. finances a nearly $2 trillion budget deficit.

"According to Tom Tzitzouris, head of fixed income at Strategas Research Partners, if we continue to run trillion-dollar-plus deficits beyond 2025, it will eventually overwhelm T-bill issuance."

The Treasury market currently has an estimated $2 trillion in "excess" Treasury bills, according to Strategas.

Tzitzouris stated that the market is more concerned with gradually scooping and tossing out the five-to-10-year portion of the curve majority than with the deficit next year.

Recently, the Treasury Department has been issuing bills at a higher rate than usual, which is above 20% of total debt. This is due to ongoing debates over the debt ceiling and budget, as well as the Treasury's need to quickly obtain funds to keep the government running.

The Securities Industry and Financial Markets Association reported that Treasury issuance totaled $26.7 trillion through November in 2024, which represents a 28.5% increase from the previous year.

This year, Treasury Secretary Janet Yellen received criticism from congressional Republicans, economist Nouriel Roubini, and Scott Bessent, who accused the department of issuing too many bills to keep near-term financing costs low and stimulate the economy during an election year.

Since late September, the Federal Reserve has lowered its benchmark borrowing rate by a half percentage point, resulting in a surge in yields.

The Treasury market has had a miserable year as yields and prices moved in opposite directions. In 2024, the lost more than 11%, while the gained a 23% return.

Another challenging year for fixed income may be ahead as traders price in a shallower path of rate cuts and investors face an influx of issuance.

"Tzitzouris stated that the deficit for the next year should decrease significantly compared to 2024. However, the major concern at present is the excessive spending and bill tossing."