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Investment Strategies

U.S. Debt Ceiling Impasse and Investment Implications

As the debt ceiling issue plays out in the coming months, this is one of many factors that could create episodes of market volatility, which investors should consider as they allocate capital in 2023.

Text on screen: PIMCO

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Text on screen: Jerry Woytash, Portfolio Manager, Short-term desk

Woytash: A lot of financial advisors and their clients have been raising concerns about the debt ceiling standoff in Congress and its impact on U.S. Treasuries.

Images on screen: US Capitol building

U.S. government debt markets are often referred to as the deepest and most liquid markets in the world.  The interest rates on U.S. government debt serve as a benchmark that most other assets are priced relative to.  A large part of why Treasuries have been used as the benchmark rate for other investments is that investors think of them as having the lowest risk profile and the least amount of uncertainty. 

Text on screen: The debt ceiling dynamic may look very different as the deadline for Congress comes into focus

Images on screen: Freeway construction, solar panels, military plane

So although we think it’s too early to say that the debt ceiling is a threat to this. If the government opted to not pay its debts - even for a brief period of time, then it would be unprecedented and the market impact would be difficult to predict.

The impact on broader financial markets has thus far been limited.  This is not surprising since it is uncertain how raising the debt ceiling will play out and the debt ceiling is just one of many risks that the global economy faces. 

Images on screen: Commercial bank exterior, bank transaction

Generally, money markets are primarily impacted because the Treasury issues fewer bills than usual until the debt ceiling is raised. Counterintuitively, this increases liquidity in money markets as investors are forced to seek out alternative ways to invest their cash.

Text on screen: Increasing T-bill issuance can potentially provide liquidity opportunities for active managers

Images on screen: US Treasury building

After the debt ceiling issue is resolved, we expect that the Treasury will rebuild its cash balances by increasing bill issuance – providing an opportunity for active investors to help provide liquidity.

As the debt ceiling showdown continues over the coming months, we think this is just one of many factors that could create episodes of market volatility which investors should consider as they allocate capital in 2023.

The primary thing investors should do is to ensure that they are prepared for multiple outcomes. At PIMCO, we are constantly reviewing liquidity management and operational procedures to ensure we are prepared for a wide variety of outcomes.

Amid uncertainties, it is important for investors to stay diversified and PIMCO’s active management approach can help investors navigate the changing landscape-

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Disclosure


All investments contain risk and may lose value. Diversification does not ensure against loss.

Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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