As the Federal Reserve embarked on its latest cycle of interest rate cuts, the financial landscape brimmed with optimismInvestors broadly anticipated a corresponding decline in U.STreasury yields, hoping that the bond market would finally shift into a bullish phaseHowever, the unpredictable nature of the market often complies with the adage that expectations rarely keep pace with reality.

After sharp adjustments in market forecasts regarding anticipated Fed rate cuts, the aggressive bets previously made on government bonds began to retractThis shift further aggravated the situation within the Treasury marketFor 2024, the outlook for U.STreasury bonds appears grimA case in point is the iShares 20+ Year Treasury Bond ETF, which experienced a staggering decline exceeding 11% within the current year, while the S&P 500 index soared by 23% in contrast.

The plummet in bond values can be traced back to the aftermath of a prolonged bull market that concluded in 2021. Since then, U.S

Advertisements

Treasury securities have seemingly remained mired in a quagmire, and the pressures on the Treasury market show no signs of abatingRecent news of tariff discussions also unsettled the bond market, inciting further volatilityAdditionally, later in the year, the market braces for the looming expiration of nearly $3 trillion in bonds, which could exacerbate the challenges faced by the Treasury sector.

Yields on 30-year and 10-year Treasury bonds surged to new multi-month highs recentlyOn the 6th of the month, speculation regarding the effectiveness of proposed tariff policies led to a brief dip of 1% in the dollar indexNonetheless, as clarity emerged, the dollar regained nearly half of those lossesHowever, the bond market began recalibrating itself for persistent volatility, with the auction of 30-year government bonds on the same day revealing stark weakness in demandThis lackluster auction pushed yields up to 4.86%, marking the highest point since November 2023.

Furthermore, the 10-year Treasury yield spiked to 4.64%, the zenith since May of the previous year

Advertisements

The difference between the yields on 10-year and 2-year Treasury bonds also widened to 35 basis points, the largest gap since May 2022. FHN Financial's macro strategy expert, Caponoli, noted, “There is a significant uncertainty surrounding what will occur following the new president’s inaugurationWhat impact will this have on Treasury issuance? I believe no one can confidently assert what the effects will beHowever, the probability of rising risks for Treasury yields is increasingly likely.”

Demand woes marked another short-term factor, with a recent auction of $58 billion in 3-year Treasury bonds resulting in a bid-to-cover ratio of just 2.62, alongside a 1 basis point increase in the awarded yield compared to pre-auction market levelsThe subsequent days will see additional auctions of $39 billion in 10-year bonds and $22 billion in 30-year bondsMoreover, a wave of high-rated corporate bond issuances is likely to compete with Treasuries for investor liquidity.

Bianco Research’s founder, Bianco, is forthright in his assessment: “For various reasons, we remain in a long-term trend of rising Treasury yields

Advertisements

The 10-year yield could rise further to 5%, the highest level since 2007.” Additionally, asset management firm PIMCO has forecasted that the 10-year yield may reach 5% by the first quarter of 2025.

The most pessimistic predictions come from the Dutch International GroupTheir global debt and interest rate strategy head, Gavi, anticipates that the 10-year Treasury yield may ascend to approximately 5.5% by the end of 2025. This forecast assumes that the Fed will maintain restrictive rates in an attempt to counter inflationary pressures stemming from tax cuts and tariffs, coinciding with growing investor concern over the federal budget deficit.

This year alone, the U.Sis projected to see nearly $3 trillion in maturing bonds, predominantly consisting of short-term debtCurrently, to finance budget deficits, the nation already carries $2 trillion in debtIf the market fails to absorb such a vast scale of Treasury issuance, the bond sector could face its next substantial hurdle.

According to the fixed income director at Strategas Research Partners, Chisoris, “If we expect to see over a trillion-dollar budget deficit in 2025, the accumulation of new and old debts will eventually overwhelm the short-term Treasury issuance market.” He estimates that out of the $28.2 trillion Treasury market, $2 trillion consists of “excess” bonds that will need to be gradually absorbed and redistributed across the 5 to 10-year part of the yield curve, complicating the market further.

A report from the Securities Industry and Financial Markets Association disclosed that as of November of last year, total U.S

• Promoting Safe and Orderly Development of Nuclear Energy
• Nvidia Loses $240B in Market Value Overnight
• U.S. JOLTS Job Openings Exceed Expectations
• Elevating the Full Chain of China's Automotive Industry
• Anthropic Seeks $2B at $60B Valuation

Treasury issuance for 2024 was anticipated to reach $26.7 trillion, reflecting a 28.5% increase from 2023. Traditionally, the U.STreasury prefers to maintain short-term notes at more than 20% of total debt owedHowever, ongoing struggles over the debt ceiling and fiscal budget, coupled with a need for liquidity, have resulted in an uptick in this ratio.

Previously, U.STreasury Secretary Yellen faced criticism from Congressional Republicans and the infamous “DrDoom,” Nouriel Roubini, for allegedly issuing an excessive number of bonds to keep short-term borrowing costs low to stimulate the economy.

Peters, Co-Chief Investment Officer of Fixed Income at Prudential Investment Management, stated, “The market is flooded with debt, and supply continues unabatedCoupled with potential sticky inflation or even rising rates, this spells increasing pressure for the Treasury market.”

Chisoris concluded, “Compared to 2024, fiscal deficits in 2005 should theoretically decline