As investors pour cash into money-market funds, analysts are warning that the Congressional standoff over raising the federal government’s debt limit will put pressure on these traditional safe haven holdings.
Money-market funds focused on U.S. Treasury securities, generally considered the safest of money funds, “could face increased volatility in the Treasury market and heightened investor redemptions as the debt ceiling deadline approaches,” Fitch Ratings said in a late February report. If investors stampede out of money-market funds as that deadline nears, the funds’ managers may be forced to sell Treasury holdings in a volatile market, putting them at greater risk of “breaking the buck,” or falling below the steady $1 share price money funds typically aim to maintain, analysts say.
Over the years, money-market funds have proven to be incredibly stable and resilient, with only two ever “breaking the buck,” one in 1994 and the other in 2008. But unlike savings accounts, they are not insured by the Federal Deposit Insurance Corp. These funds have withstood past debt-ceiling crises, and fund managers have an array of tools to manage the risks, including avoiding securities maturing on or around the “x date”–the day when the federal government runs short of money to pay all its bills on time. But plenty of uncertainty remains, money-fund experts say, in part because no one knows exactly when the x-date will be and the current debt-ceiling debate is particularly contentious. In addition, the substantial growth in government money fund assets in recent years has the potential to create more volatility, researchers say.
Money-fund assets climbed $56 billion last month, hitting a record $5.3 trillion in early March, according to Crane Data. In a shift from years past, much of the recent growth in assets has come from mom and pop investors rather than big institutions, said Crane Data president Peter Crane, as those retail investors seek out higher-yielding parking spots for their cash. The 100 largest taxable money funds had an average seven-day yield of 4.39% at the end of February–a level last seen before the 2007-2009 global financial crisis–whereas brokerage sweep accounts tracked by Crane had an average yield of 0.43%. Money fund yields are expected to move higher after the Federal Reserve’s next meeting later this month.
Money-market funds generally invest in very short-term, high-quality debt securities. Treasury-only money funds invest virtually all of their assets in U.S. Treasury securities, but other types of money funds may invest in government agency securities, commercial paper, tax-exempt municipal debt and other holdings. In a debt-ceiling crisis, it’s the Treasury-only funds that can’t invest in anything else that would be most impacted, said Kimberly Green, senior analyst at Fitch, whereas other types of money funds may also hold some Treasuries but “have a lot more flexibility” to manage their exposure to those securities.
The federal government reached its debt limit in mid January, but the U.S. Treasury is using “extraordinary measures”–such as suspending certain investments in federal retiree programs–to borrow additional money without breaching the ceiling. If the debt limit doesn’t budge, those measures will be exhausted at some point in the coming months–potentially between July and September, according to the Congressional Budget Office. But it’s hard to pinpoint a date because the timeline could be affected by factors such as the amount of income-tax receipts in April, the CBO said in a report last month.
Investors concerned about the standoff may want to consider more broadly diversified government and prime money-market funds rather than Treasury-only funds, money-fund experts say. With Treasury money funds, “normally you’re getting extra safety, but in this case the safety advantage is more than nullified by this looming issue,” Crane said.
Past debt-ceiling crises hint at possible challenges
Past debt-ceiling crises indicate some of the challenges that money funds may face this time around. In 2011 and 2013, Congress resolved debt-ceiling issues shortly before the drop-dead date–and in both cases, short-term Treasury bill rates rose sharply about two weeks before the x-date, according to a recent report from the Federal Reserve Bank of Kansas City. Money-market funds, particularly government funds, also had unusually large outflows in the two weeks before the debt-ceiling resolution in 2013, the report said.
“This is not money market fund managers’ first rodeo,” said Peter Gargiulo, director at Fitch. “They have navigated these waters in the past,” he said, and will be proactive about communicating with investors and mitigating the risks of rapid-fire redemptions.
Government money-fund assets, however, have grown substantially since 2013, and “thus, liquidity swings could be larger and more destabilizing today,” the Kansas City Fed report said.
Another difference between the prior and current debt-ceiling debates is the level of discord within Congress today, said Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes
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“It doesn’t give you a whole lot of good feeling,” that issues will be resolved quickly, she said.
The wide range of potential “x-dates” is also causing some headaches, money fund managers say. “It’s such a broad three- to four-month window right now,” that it’s hard to avoid maturities within that range, Cunningham said. “I think over the course of the next month and a half, we’ll have better clarity on that,” she said. “It’s still early in the game.”
Treasury-only funds face some particular challenges dodging securities that mature within the wide x-date window, given their limited investment flexibility, said Robert Motroni, portfolio manager in JP Morgan Asset Management’s global liquidity business, “but we have found sufficient Treasury supply outside the window to position our funds in a diversified manner. As the x-date window narrows over time, this will open up further maturity dates for potential investment.”
