Taking precautions in advance! The US debt ceiling crisis may resurface, fund managers are adjusting their portfolios six months ahead of schedule

According to Zhitong Finance APP, investors are already planning to adjust their investment portfolios to prepare for the next U.S. debt ceiling crisis, even though there is still more than six months before the two parties in the United States "show their cards" on the debt ceiling.

As the U.S. government approaches the critical point of being unable to repay its debts, the possibility of a U.S. Treasury default is increasing. Money market funds are the largest holders of U.S. Treasuries, with total assets of a record $6.12 trillion. While fund managers are still buying a large amount of new bonds, they expect bond supply to slow down as the U.S. Treasury approaches the debt ceiling.

The U.S. debt ceiling will be reinstated on January 1st next year, putting pressure on policymakers to find a solution before the borrowing authority of the U.S. Treasury is exhausted. Although market participants have dealt with this situation many times over the past 10 years, the short-term bond market may still be threatened by default. Last year, concerns escalated as negotiations over the U.S. debt ceiling reached an impasse, causing short-term U.S. Treasury yields to exceed 7%.

Investors and strategists say this will actually force them to consider putting more funds into the Federal Reserve's overnight reverse repurchase agreement tool. This investment has a lower yield but is safer and more liquid than other eligible investments.

Mike Bird, Senior Portfolio Manager at Allspring Global Investments, said last week, "We have experienced disasters like this many times before." He pointed out that this would be the tenth time he has experienced a debt ceiling issue. "Internally, we have a good strategy to deal with the debt ceiling issue, and shareholders and investors have a better understanding of the potential consequences of this process."

Treasury bills and other cash-like instruments typically make up the majority of money market investment portfolios. Since the beginning of 2023, these funds have absorbed approximately $2.2 trillion in U.S. Treasuries and are expected to continue buying. Some expect that as the debt ceiling approaches, the U.S. government will reduce bond supply later this year.

Gennadiy Goldberg, Head of U.S. Rate Strategy at TD Securities, said, "Buy quickly and buy in large quantities, because the number of bills will decrease in the future. This year marks the end of the bond issuance boom."

TD Securities expects the U.S. to exhaust its borrowing authority by the end of summer 2025, with a net issuance of $170 billion in bills in 2025.

Legislation by the U.S. government indicates that the reinstatement of the debt ceiling may not be as severe as past debt ceiling crises, but the outlook remains unpredictable, especially in an election year.

The last time there was an excess of cash chasing too few assets was at the end of 2022, when the balance of the Federal Reserve's reverse repurchase tool peaked at $2.55 trillion. After the debt ceiling was suspended in June 2023, the U.S. Treasury injected a large amount of bills into the market, allowing money market funds to return to higher-yielding assets.

Mark Cabana, Head of U.S. Rate Strategy at Bank of America, expects that as the imbalance between cash and collateral levels at the U.S. Treasury intensifies, money market funds will once again turn to reverse repurchase agreements