Investors are already in suspense over the eventual return of the US debt ceiling.

The investors They are already planning changes to their portfolios in anticipation of the next showdown over the US debt ceiling, even though it is still more than six months away.

Money market funds are the largest holders of Treasury bills, which become increasingly vulnerable to default as the U.S. government approaches the point where it cannot pay its debt. Although managers of those funds – which together hold a record total asset value of $6.12 trillion – continue to gobble up new issues, they soon expect supply to slow as the Treasury approaches its borrowing limit.

That limit is about to be reset on Jan. 1, putting pressure on lawmakers to find a solution before the Treasury’s borrowing authority runs out. Although market participants have faced this situation repeatedly over the past decade, futures markets remain at risk of being shaken by the threat of default. During the most recent episode, last year, Treasury bill yields at one point exceeded 7%.

This will force them to consider parking more cash in the Federal Reserve’s overnight reverse repurchase agreement instrument, investors and strategists say. This offers lower returns, but is safer and more liquid than other qualified investments.

“We have been through this debacle many times”said Mike Bird, portfolio manager at Allspring Global Investments, who spoke last week at the Crane Monetary Fund Symposium in Pittsburgh. He noted that this will be his tenth episode of debt limitation. “Internally, we have a pretty good strategy for how we can manage the debt ceiling, and shareholders and investors have become more educated about what the process may entail.”.

Congress can raise or suspend the U.S. debt ceiling at a time when the Treasury needs more money to support the federal government and pay obligations like Social Security and Medicare.

Once the limit is about to be exceeded or the suspension ends, the Treasury deploys a series of extraordinary measures to ensure that it has enough borrowing authority to remain below the limit until an agreement is reached. These include cutting the size of bill auctions and suspending payments to public administration accounts.

Treasury bills and other similar instruments typically make up the bulk of money market portfolios. These funds have absorbed roughly $2.2 trillion in Treasury debt since the beginning of 2023, and they hope to continue buying as much as they can. Some expect the Government to reduce the supply of bills later this year, as the return of the debt ceiling approaches.

TD Securities expects the United States to exhaust its borrowing authority by the end of summer 2025, with net note issuance of $170 billion in 2025.

Government legislation suggests that the slide to reinstatement of the debt limit may not be as severe as past debt ceiling debacles, but there is always an air of unpredictability, especially in an election year.

The last time there was too much cash chasing too few assets, in late 2022, balances in the Federal Reserve’s reverse repurchase tool rose to a high of $2.55 trillion. Once the debt limit was suspended in June 2023, the Treasury Department flooded the market with bills, allowing money funds to return to higher-yielding assets.

Mark Cabana, head of U.S. interest rate strategy at Bank of America Corp., expects money funds to return to repos again as the imbalance between cash and Treasury collateral levels widens.

Although money fund managers are aware of the deal that awaits them after the resolution of the debt ceiling, once again, they would prefer not to go through it.

“I would gladly return that avalanche of supply that awaits us later because we don’t have to deal with the debt ceiling.“Bird maintained.