The bond market faces a record supply wave of Treasury bonds nearing $1 trillion in the second half of 2025.
Wall Street is tense as the second half of 2025 is expected to unleash new Treasury bonds up to $1 trillion, ready to shake the bond market.
This wave will hit the market as lawmakers address the federal debt ceiling, potentially even completely removing this limit. The timeline is not finalized but is very close, and all traders are well aware of this.
Most of the Treasury bond issuance will be short-term debt, particularly Treasury bills (T-bills) with maturities under one year. This type of debt is easy to issue quickly but will challenge demand due to a sudden large supply.
Trump's fiscal bill increases the budget deficit, constraining Treasury bond issuance.
Mr. Donald Trump is pushing for a new tax and spending bill, which the Congressional Budget Office estimates could increase the federal budget deficit by an additional $2.8 trillion over the next 10 years. This bill supports short-term economic growth, but the long-term cost is higher public debt, forcing the government to issue more Treasury bonds to compensate.
Treasury Secretary Scott Bessent stated that the Senate could vote on this bill on Friday and is confident that the House will pass it afterward. The crucial timeline is the 'X-date' – the point at which the government exceeds the borrowing limit set by the current debt ceiling, expected to fall in mid or late summer.
When the debt ceiling is raised or removed, the Treasury will be able to issue a large quantity of bonds in the market – not just in small portions.
Forecasts indicate that Treasury bond issuance will reach $1 trillion in 2025.
Mark Cabana, Head of U.S. Interest Rate Strategy at BoFA Securities, stated at the Money Fund Symposium in Boston that the market needs to prepare for an enormous and rapid supply. 'There will be a large issuance in the coming months,' Cabana said. 'You can debate when to raise the debt ceiling, but the X-date is approaching very soon.'
Cabana predicts that the Treasury will issue about $1 trillion in bonds by the end of the year. A similar view is shared by Gennadiy Goldberg, Head of U.S. Interest Rate Strategy at TD Securities, who expects the issuance of about $700 billion to be concentrated in August and September.
Repo rates may rise as money market funds reduce their investments in Treasury bonds.
The wave of massive Treasury bonds will not just sit in portfolios; it will have a significant impact on the repo market – where banks and funds borrow short-term money using bonds as collateral.
When too many Treasury bonds flood the system, repo rates may initially decrease due to oversupply, but if demand is not strong enough, this rate will rise quickly as lenders demand higher interest to compensate for the risk of holding many securities.
Goldberg emphasizes that supply will primarily focus on the group of bonds maturing from 2 to 7 years. 'We expect issuance to continue to focus on short maturities, especially short-term coupon bonds,' he said.
He also mentioned that there are no plans for major changes to the auction schedules until mid or late 2026, with assessment points possibly falling in August or November.
Not only is the group of long-term bonds like 10-year, 20-year, 30-year not focused on issuance, but Goldberg also predicts that the size of issuance in this group may decrease. Instead, 2-year, 3-year, 5-year, 7-year notes and T-bills are prioritized as short-term funding instruments.
Money market funds – a potential source of demand but currently shifting away from Treasury bonds.
A single bright spot that could absorb the large supply is money market funds, which reached a record $7.4 trillion in assets last June. However, the issue is that these funds are shifting investments from Treasury bonds to private repo contracts with higher interest rates.
There may be plenty of money, but it does not always enter the Treasury bond market, creating a demand gap as the government prepares to launch the largest amount of debt ever.
Now, all eyes are on the vote regarding the debt ceiling and the large issuance slated for August-September. If the debt ceiling is raised in time and demand is strong enough, the market may absorb this supply shock. If not, bond trading departments will face challenging days ahead.
Source: https://tintucbitcoin.com/wall-street-doi-pho-lu-tpcp-ky-luc/
Thank you for reading this article!
Please Like, Comment, and Follow TinTucBitcoin to stay updated with the latest news about the cryptocurrency market and not miss any important information!
