According to the Zhitong Finance APP, CITIC Construction Investment Securities released a research report stating that there is a certain misunderstanding regarding the maturity repayment pressure of U.S. Treasury bonds that is being widely discussed in the market. While the maturity repayment and new supply scale of U.S. Treasury bonds are indeed not low, they have not marginally deteriorated and have been operating in a deep-water zone in recent years. The real issues that need attention are: First, the U.S. corporate bond market faces dual pressures from maturity and fundamental deterioration; second, the true supply test of U.S. Treasury bonds may occur in the second half of the year with the resolution of the debt ceiling and the implementation of tax cuts. It is expected that the Federal Reserve will initiate a new round of structural quantitative easing (QE) to coordinate with this and relax restrictions on commercial banks' supplementary leverage ratios, thereby hedging against the subsequent supply pressure of U.S. Treasury bonds.
1. The maturity repayment and new supply scale of U.S. Treasury bonds are not low, but they have not marginally deteriorated and have been operating in a deep-water zone in recent years
There is a certain misunderstanding in the market regarding the maturity repayment pressure of U.S. Treasury bonds:
(1) The peak maturity scale of U.S. Treasury bonds in 2025 is a &#34;false impression,&#34; mainly because the maturity of the principal short-term Treasury bills is within one year. Any statistical distribution of future maturities at any point in time will find that the next year is a peak.
(2) The total amount maturing this year is very high + marginally increasing, but it is mainly short-term Treasury bills, while the maturity amount of coupon Treasury bonds has actually decreased.
(3) The total supply pressure of medium- and long-term U.S. Treasury bonds (rollover + new issuance) has not marginally deteriorated.
Overall, the maturity and new issuance of U.S. Treasury bonds have not been low in recent years, not unique to this year; in addition, the probability of default on U.S. Treasury bonds is low, and the current high interest rate level makes it attractive to replace low-interest maturing old bonds with high-interest newly issued bonds. Therefore, arguing that there is risk in the U.S. Treasury bond market solely based on the maturity repayment scale is logically flawed.
2. Maturity repayment pressure is more evident in the U.S. credit bond market
The U.S. corporate bond market faces three major issues:
(1) The maturity scale in 2025 continues to rise.
(2) Bonds issued at ultra-low interest rates during the pandemic will face higher reset costs when maturing in 2025.
(3) The U.S. economy is likely to weaken in the future, which is unfriendly to the corporate bond market, and the credit spread of high-yield bonds may continue to widen.
However, it should be noted that the deterioration of the corporate bond market does not necessarily mean a liquidity crisis; if there is no systemic shock, the pressure may not necessarily transmit to the U.S. Treasury bond market.
3. The true test point for U.S. Treasury bonds on the supply side may occur in the second half of the year with the resolution of the debt ceiling and the implementation of tax cuts
(1) Around the third quarter, after the debt ceiling is lifted, there will be a surge in short-term bond supply: on one hand, the current SOFR center shows signs of rising; on the other hand, when the Treasury's deposits rise significantly, the trend of U.S. Treasury bonds often tends to be weak.
(2) Around the fourth quarter, with the implementation of the tax cut bill, the Treasury may increase the issuance scale of medium- and long-term U.S. Treasury bonds. After a similar operation by the Treasury in August 2023, the 10-year U.S. Treasury yield surged by 5%.
(3) It is expected that the Federal Reserve will end balance sheet reduction, initiate structural QE, and relax bank regulations (such as supplementary leverage ratios) to hedge against the subsequent supply pressure of U.S. Treasury bonds.
(4) Compared to the pressure on the supply side, more attention should be paid to the risk of deterioration on the demand side for U.S. Treasury bonds.
Recently, U.S. Treasury yields have risen significantly, and the market has expressed concerns about maturity repayment issues. How to assess the subsequent pressure?
1. The maturity repayment and new supply scale of U.S. Treasury bonds are indeed not low, but have not marginally worsened, and have been operating in a deep water zone in recent years.
How should we view the two pieces of news that have been hotly discussed in the market: &#34;The maturity scale of U.S. Treasury bonds will rise sharply to $9 trillion in 2025&#34; and &#34;The maturity scale in June will reach as high as $6 trillion&#34;?
There is a certain misunderstanding here:
(1) The spike in the maturity scale of U.S. Treasury bonds in 2025 is an &#34;illusion.&#34;
U.S. Treasury bonds are mainly divided into short-term Treasury bills and medium- to long-term coupon bonds. Since the former has a maturity of less than one year, any statistical distribution of maturities for the next several years at any given point will show a spike in the next year's maturity scale, followed by a significant decline, creating an &#34;illusion.&#34; In fact, the actual maturity scale of U.S. Treasury bonds in 2024 is not much different from that in 2025. Considering that financing in 2025 will still rely heavily on short-term Treasury bills, the actual maturity scale of U.S. Treasury bonds in 2026 will still be around $9 trillion, and the currently reported amount is severely underestimated.
(2) The total maturity amount is high and rising, but it is mainly short-term Treasury bills, while the maturity amount of coupon bonds is actually declining.
Although the total maturity amount reaches $9 trillion and has significantly increased in the past two years compared to before, the main part is still short-term Treasury bills. The maturity scale of medium- to long-term coupon bonds remains relatively stable, and in 2025 it is actually lower than in 2023 and 2024. Since the holders of short-term Treasury bills are mainly money market funds, their participation in medium- to long-term U.S. Treasury bonds is relatively low. Therefore, changes in liquidity in this part of the market have a limited impact on long-term U.S. Treasury bond rates. Additionally, considering the large scale of excess reserves in money market funds and banks, the pressure to absorb short-term Treasury bills is not significant. Thus, using the $9 trillion maturity scale to assess maturity pressure is not very appropriate.
<img src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/d162d47eb1d75bb99d303a12ecfb683f.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/d162d47eb1d75bb99d303a12ecfb683f.jpg"/>
(3) The overall supply pressure of medium- to long-term U.S. Treasury bonds (rollover + new issuance) has not marginally worsened.
For trading medium- to long-term U.S. Treasury bonds, a more appropriate supply pressure indicator is to observe the auction plans for coupon bonds published by the Treasury Department, as it includes both the rollover of maturing U.S. Treasury bonds and the newly issued U.S. Treasury bonds. Data shows that the Treasury Department last increased the auction plan in August 2023, and starting from the second quarter of 2024, the auction pace has remained roughly stable, especially as the issuance of 10-year U.S. Treasury bonds has not increased.
<img src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/ed42e29d8b849700b494bcab49b39058.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/ed42e29d8b849700b494bcab49b39058.jpg"/>
Overall: In recent years, the maturity and new issuance of U.S. Treasury bonds have not been low and are not unique to this year; in addition, the probability of U.S. Treasury bond default is low, and the current interest rate level is high, making it attractive for the market to replace low-interest maturing bonds with high-interest newly issued bonds. Therefore, simply arguing that there are risks in the U.S. Treasury bond market based on the maturity repayment scale has logical flaws
II. Expiration Payment Pressure More Evident in the U.S. Credit Bond Market
U.S. corporate bonds face three major issues:
(1) The scale of maturities in 2025 continues to rise
As a large number of bonds issued during the pandemic gradually mature, the scale of U.S. corporate bond maturities entered an upward channel starting in 2023, reaching USD 910 billion in 2025, an increase of USD 45 billion from the previous year, with a significant rise still expected in 2026.
<img src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/6300e9911dfadeec0323ce5c89111b82.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/6300e9911dfadeec0323ce5c89111b82.jpg"/>
(2) Bonds issued at ultra-low interest rates during the pandemic will face a significant increase in reset costs when refinancing
In 2020 and 2021, benefiting from zero interest rates and QE policies, U.S. corporate bond yields were generally low, with the average level for high-grade varieties only at 2-3%. With the initiation of the interest rate hike cycle, starting in 2023, yields have gradually switched to a higher level of 5-6%. This means that once these corporate bonds need to be rolled over, overall interest expenses will increase significantly.
<img src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/d9e45e76ede90e1b999e3fe0c0cf818e.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/d9e45e76ede90e1b999e3fe0c0cf818e.jpg"/>
The payment pressure brought about by the interest rate switch is mainly concentrated in 2020-2021. We have compiled the maturity distribution of corporate bonds issued during this period. The data shows that in 2025, it will reach around USD 260 billion, an increase of about USD 30 billion from 2024. If we consider the medium-interest corporate bonds issued in 2022, the marginal increase will be even greater, indicating that this year's pressure has indeed risen.
<img src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/75dc174f54356bcb513863e8a53e7e95.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/75dc174f54356bcb513863e8a53e7e95.jpg"/>
(3) The U.S. economy is likely to weaken subsequently, which is unfavorable for the corporate bond market
Finally, even without considering the maturity payment issues, the economic downturn (marginal slowdown + tariff shocks) increases operational pressure on enterprises, which will also pose challenges to debt repayment. Historical experience shows that as the U.S. economy weakens, the credit spread of high-yield bonds tends to rise, leading to a marginal deterioration in the U.S. corporate bond market.
However, it should be noted that the deterioration of the corporate bond market does not necessarily mean a liquidity crisis; if there is no systemic shock, the pressure may not transmit to the U.S. Treasury market.
<img src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/a758cc226b4631d673f610fc3c512de6.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/a758cc226b4631d673f610fc3c512de6.jpg"/>
3. The Real Test Window for U.S. Treasury Bonds on the Supply Side May Be in the Second Half of the Year with the Resolution of the Debt Ceiling and Implementation of Tax Cuts
From previous trading experiences with U.S. Treasuries, the issue of the scale of maturing debt generally receives little attention. The main events that could cause fluctuations in U.S. Treasuries on the supply side are the surge in short-term debt issuance following the resolution of the debt ceiling and the Treasury's increase in the issuance of medium- to long-term debt. Both of these issues may arise in the second half of the year.
(1) Surge in Short-Term Debt Supply After the Debt Ceiling: U.S. Treasuries May Weaken When Treasury Deposits Rise Significantly
Although there is a certain degree of separation between the short-term debt market and the medium- to long-term debt market, they may be influenced by sentiment and other factors. Historically, during periods of significant increases in the Treasury's TGA account, the 10Y U.S. Treasury yield tends to rise.
Currently, the two parties have reached a framework agreement on the budget, and the debt ceiling issue is expected to be resolved in the second or third quarter. A large amount of short-term Treasury bills will be issued, and the TGA account will be rebuilt. In this context, if the fundamentals of U.S. Treasuries are in an unfavorable environment at that time, yield fluctuations may be amplified.
<img src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/a81a9b1d9f70fbfc922a37e1402252da.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/a81a9b1d9f70fbfc922a37e1402252da.jpg"/>
(2) After the Tax Cut Bill is Passed, the Treasury Will Face Pressure to Increase Medium- to Long-Term U.S. Treasury Issuance
Trump's new version of the tax cut may add $1.3 trillion in deficits over the next decade, with an average annual increase of $130 billion, leading to a rising demand for Treasury issuance.
Since the proportion of short-term Treasury bills in the total outstanding U.S. Treasuries is already significantly above the upper limit of the acceptable range of 15-20%, there are certain soft constraints on continuously financing through the issuance of short-term debt. We anticipate that the Treasury may consider increasing the supply of medium- to long-term debt in the second half of the year.
In August 2023, the U.S. Treasury raised the issuance scale of medium- to long-term debt, after which the 10Y U.S. Treasury yield reached a peak of 5% under supply pressure.
<img src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/188c7ba52057047cedfe80f6001c43e2.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/http://img.zhitongcaijing.com/images/contentformat/188c7ba52057047cedfe80f6001c43e2.jpg"/>
(3) It is Expected that the Federal Reserve Will End Balance Sheet Reduction, Initiate Structural QE, and Relax Restrictions on Commercial Banks' Supplementary Leverage Ratios to Hedge Against Subsequent Supply Pressure on U.S. Treasuries.

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CSC expects the Federal Reserve to initiate a new round of structural QE to address the supply pressure of U.S. Treasuries and relax the leverage ratio restrictions on commercial banks. Although the market misunderstands the repayment pressure of maturing U.S. Treasuries, the actual situation is that the repayment of maturing bonds and new supply has not marginally worsened. The real concern lies in the dual pressure of maturing debts and deteriorating fundamentals faced by the U.S. corporate bond market

- Citic Securities reports that concerns over U.S. Treasury debt repayment pressures are somewhat misunderstood, as while the repayment and new supply are significant, they have not marginally worsened.  
- The real issues lie in the U.S. corporate bond market, which faces dual pressures from maturing debts and deteriorating fundamentals, with a projected increase in corporate debt maturities in 2025.  
- Upcoming challenges for U.S. Treasuries may arise from the resolution of the debt ceiling and tax cuts later this year, potentially leading to increased supply and necessitating Federal Reserve interventions to mitigate supply pressures.

Zhitong

CSC: It is expected that the Federal Reserve will initiate a new round of structural QE to hedge against the subsequent supply pressure of U.S. Treasury bonds