Even though there are still more than six months before the Democrats and Republicans confront the US debt ceiling, investors are already planning to adjust their investment portfolios to deal with the crisis.

The US debt ceiling will be reinstated on January 1st, putting pressure on policymakers to find a solution before the Treasury Department's borrowing authority is depleted. Although market participants have faced this issue multiple times over the past decade, the front end of the bond market remains at risk of default. In the most recent crisis last year, yields on US Treasury bills briefly soared above 7%.

Investors and strategists say this will force them to consider depositing more cash into the Federal Reserve's overnight reverse repurchase agreement (RRP) tool. Although RRP yields are lower, they are safer and more liquid than other investments.

"We've been through this disaster many times," said Mike Bird, senior investment portfolio manager at Allspring Global Investments. Speaking at Crane's Money Fund Symposium in Pittsburgh last week, he noted that this would be his tenth time experiencing the debt ceiling issue.

When the Treasury Department needs more funds to keep the federal government running and fulfill obligations such as Social Security and Medicare, Congress can raise or suspend the US debt ceiling.

Once the debt approaches its limit or the temporary period of the debt ceiling suspension expires, the Treasury Department takes several special measures to ensure sufficient borrowing authority and keep debt below the limit until an agreement is reached. These measures include significantly reducing the size of Treasury bill auctions and temporarily suspending payments to government accounts.

Some expect the government to reduce Treasury supply later this year as the debt ceiling becomes closer to being reinstated.

"Buy and buy a lot, because there will be fewer bills later," said Gennadiy Goldberg, head of US rate strategy at TD Securities. "This year is the end of this wave of issuance."

According to TD Bank, the US will run out of borrowing authority in late summer 2025 and issue a net $170 billion in bills that year.

Government legislation suggests that the reinstatement of the debt ceiling may not be as severe as past debt ceiling crises, but it always brings an unpredictable atmosphere, especially in an election year.

The last time cash chased too few assets was at the end of 2022, when the peak of the Fed's RRP balance reached $2.55 trillion. After the debt ceiling was temporarily suspended in June 2023, the Treasury Department issued a large amount of bills to the market, allowing MMFs to return to higher-yielding assets.

Mark Cabana, head of US rate strategy at Bank of America, expects money market funds to turn to RRP again as the imbalance between the Treasury's cash and collateral levels intensifies.

Money market funds, with a record assets of $6.12 trillion, are the largest holders of US Treasuries, with Treasury bills and other cash-like instruments typically making up the majority of MMF portfolios. Since early 2023, these funds have absorbed about $2.2 trillion worth of US Treasury bills and are expected to continue buying for as long as possible.

But as the US debt approaches a critical point of being unable to repay, the risk of US Treasury default is increasing. Therefore, even though fund managers know they will face more bill supply after the debt ceiling is resolved, they still do not want to go through this process.