Capital Markets: MMFs Out of Harm’s Way if US Defaults

October 09, 2013
Fitch report says risks to MMFs from a US default are very low; a protracted deadlock is a worry however.

Investors who have cash in money market funds have little to worry about come a US default, according to a report from Fitch Ratings. That is, little to worry about if a default is short lived.

“Fitch believes the overall risk to MMFs due to a US default to be low,” according to the report. “Mark-to-market declines on US government exposures are probably manageable assuming any default is short lived and absent significant redemption activity. In part, this view reflects MMFs’ low weighted average maturities and high amounts of short-term liquidity available to meet redemptions.”

The US Treasury predicts it will run of money to pay its debts on October 17, although it apparently has a little more time. And if October 17 comes and goes and there is not resolution to the current impasse, Fitch says MMFs will be good shape. That’s because under Rule 2a-7 of the 1940 Investment Act, MMFs won’t be required to sell their holdings of US Treasury securities. Any liquidity pressures, Fitch added, will more likely come from increased redemption activity. However, “[s]o far there is no evidence that investors are taking money out of US MMFs, Fitch said, “although this might change as the deadline to raise the debt ceiling nears.”

Fitch noted that US MMFs actually saw net outflows of $8.5 billion last week of the industry’s $2.694 trillion in assets under management. But this follows rising levels if inflows for the last several months.

One reason MMFs are in good shape to weather a default is due partly to the industry adopting SEC reforms in 2010. One of main feature of these reforms was for MMFs to hold much shorter term debt. This helped the industry during the last default standoff over the debt ceiling. In the summer of 2011, MMFs were actually hit by two shocks: the debt limit fight and the crisis in eurozone.

Back then, according to the Investment Company Institute, MMF managers, anticipating that concerns about the debt ceiling impasse might lead investors to redeem shares, shortened maturities in the weeks leading up to an August 2011 deadline. ICI reported that funds also maintained levels of liquidity well above new liquidity requirements.

It’s not clear whether this is going on now, but chances are they are using the same playbook.

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