Looming debt ceiling deadline pushes some US fund managers to cash

NEW YORK (Reuters) — A potential standoff over the US federal debt ceiling is raising alarm bells among fund managers who fear a repeat of 2011 when a protracted showdown over increasing the government’s borrowing limit and subsequent downgrade of US credit quality led to a more than 15 percent slump in the S&P 500 stock index.

US investors are raising cash and buying protection, bracing for a messy fight ahead of the Treasury Department’s Sept. 29 deadline to raise the debt limit, a legal cap on how much the US government is allowed to borrow.

Failure to increase the debt ceiling could lead to a recession and prompt the first significant sell-off of the Trump administration. The benchmark S&P 500 has not fallen by five percent or more in over a year, the longest streak without such a decline in more than 20 years.

Federal efforts to clean up the devastation after Hurricane Harvey battered Texas have decreased the probability of a federal government shutdown to 35 percent from 50 percent two weeks ago, according to Goldman Sachs, as the legislation could be packaged into a larger disaster relief bill.

Yet the danger still remains, Goldman warned.

“A delayed debt ceiling hike is still clearly possible,” Goldman strategists wrote. “The president continues to raise the possibility of a shutdown if the border wall is not funded, and the upcoming extension of spending authority is likely to be temporary, potentially pushing the risk of a shutdown later into the year.”

Fund managers say they are not confident that a debt ceiling agreement will be passed as quickly as the broad market expects.

“You’ve got a political environment that is very contentious, not just left versus right but within the Republican Party itself,” said Jeff Klingelhofer, a co-portfolio manager of the $1.1 billion Thornburg Strategic Income Fund.

“If the rhetoric increases it will spook markets and we are taking risk off the table” by raising cash and lowering the credit duration in their bond portfolios, he said.

David Ader, chief macro strategist at Informa Financial Intelligence, said Treasury bills for October are about 10 basis points higher in yields than they normally would be, owing to debtceiling concerns. “People are avoiding them,” he said.