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The worst of the debt ceiling crisis is over now that lawmakers have passed a bill and sent it to President Joe Biden for signing, but investors are about to see an influx of Treasury securities enter the market. That’s because even though Congress has agreed to raise the debt ceiling and trim rein in government spending for two years, the Treasury itself will still need to replenish its cash stores in its general account. The operating cash balance in the Treasury General Account was below $50 billion as of June 1 , and the agency will need to issue new bonds to refill its coffers. Rebuilding the general account balance to a target of $700 billion for the fourth quarter means the agency will need to issue some $730 billion in Treasury bill supply over the next three months – about $1.25 trillion in issuance from June through December, according to Morgan Stanley. A large issuance of new Treasurys could push down prices of holdings in investors’ portfolios. However, “natural buyers,” in the form of money market funds and banks, will emerge to snap up the new issues, according to Gene Tannuzzo, global head of fixed income at Columbia Threadneedle. “There is enough pent-up demand to feed the beast if the Treasury is spending money,” he said. “They can soak that up.” While large investors scoop up the new T-bills, the extent to which individual investors capture the benefit will also depend on the Federal Reserve’s policy stance. If the central bank holds rates steady, income-focused investors who have been parking their money in short-term Treasurys at attractive yields may be able to do so a little longer, said Tannuzzo. The worry among investors had been that if the Federal Reserve cuts rates, individuals in short-term bonds will face reinvestment risk – in which they’re unable to find suitably attractive yields elsewhere once their holdings have matured. US6M US3M YTD line Yields on 6 month and 3 month Treasurys The 1-month T-bill yielded 5.25% on Friday, while the 6-month T-bill had a rate of 5.49%. “As you get past the debt ceiling, getting paid on your cash is still a concern, and doing it with T-bills where you still get a 5% yield is attractive,” Tannuzzo said. Adding to your holdings Keep your longer-term goals and your portfolio composition in mind. “Even though short-term price drops are possible, investors should review their portfolios and think about the long-term advantages of keeping a diversified allocation that includes Treasurys,” said James Shagawat, a certified financial planner and partner advisor with AdvicePeriod. Another reason to proceed cautiously: “In a rising rate environment, if you needed to get money out early, you could take a loss if rates have gone up,” warned Greg McBride, chief financial analyst at Bankrate. “Don’t be in a hurry to pile into a maturity that is longer than your intended time frame,” Having a financial plan and an asset allocation that reflects your goals allows investors to ignore the headline noise of debt ceiling discussions and other developments, he said. Shagawat said he loves Treasurys for retirement cash flow, but the recent high yields for T-bills have worked out such that he’s bought six-month bills to help fund the near-term goal of his child’s college tuition. “Interest rates have been so low, and to see 4%, 5% on T-bills – you can make money on money, and that’s wonderful,” Shagawat said. – CNBC’s Michael Bloom contributed to this story.
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