Money market funds, which have experienced
a significant influx of deposits due to the
recent banking turmoil, are facing a new
challenge as the political standoff over the US
debt ceiling looms. According to data provider
EPFR, over $440bn has poured into US money
market funds since early March, largely into
government money market funds that invest
heavily in short-term Treasury debt, which
offers the best yields in years thanks to the US
Federal Reserve's aggressive campaign of
interest rate rises. However, a prolonged
standoff in Washington over raising the federal
borrowing limit could create difficulties with
buying and selling this short-term debt,
potentially leading to some losses for money
funds. The alternative to buying Treasury bills,
stashing cash overnight with the Fed, could
add to strains in the banking system.
While there is no expectation that the US will
default on its obligations, investors and experts
are concerned about the potential liquidity
crunch that a debt ceiling crisis could create.
With the US tax deadline of April 18
approaching, concerns about the issue are
gaining traction. The revenue collected this
year will help determine how much longer the
US can pay its bills before running out of
money, since a divided Congress failed in
January to raise the government's borrowing
limit. Investors are expecting the fight to go
down to the wire as a stalemate between the
White House and the Republican party looks
unlikely to be resolved before the threat of
default becomes imminent late summer.
The debt ceiling debate could prove
particularly problematic for government
money market funds, according to experts.
Andrzej Skiba, Head of Bluebay US Fixed
Income at RBC Global Asset Management,
warns that "if the US government's ability to
borrow is exhausted in the midst of this crisis,
then that creates quite a lot of volatility for
money market funds—it can increase
withdrawal demands, it can just create a lot of
noise around the issue." Investors have already
started avoiding bills that mature in late July
and early August, which is when experts
believe the US may run out of money. An
auction of three-month Treasury bills this
week was met with poor demand.
Owning these less desirable securities is not a
problem if the funds hold them until maturity,
provided that the debt ceiling fight is resolved
in time for the US to pay its bills. However,
problems arise if customers pull money out of
those funds—either for normal business
reasons, or because of panic about the debt
ceiling. In that instance, money funds may
have trouble finding buyers for the securities
and be forced to take losses. As a result,
experts are advising investors to avoid T-bills
maturing around July and August within their
portfolio.
The surge of cash into money market funds has
also meant that those funds have increased
their usage of a Fed program that allows them
to invest cash at the central bank overnight for
a 4.8% return. Treasury bills are in relatively
short supply at the moment, so money funds
have stashed some of the floods of cash coming
in to the overnight reverse repo facility (RRP),
which is currently getting roughly $2.3tn a
day. If worries about the debt ceiling reduce
the number of Treasury bills money funds are
willing to buy, that could push even more cash
into the RRP. The ballooning size of the RRP
facility may add to banking strains, some
experts have warned.
Once the debt ceiling is raised, the Treasury is
expected to issue a large number of bills, which
will allow money market funds to buy them
instead of resorting to the RRP. This should
ease the pressure on the banking system
caused by the ballooning size of the facility.
Nevertheless, the potential risk for money
market funds remains, and they will need to
closely monitor the situation and adjust their
portfolios accordingly. If the US fails to raise
the debt ceiling in time, it could create a
liquidity crunch that may affect the entire
financial system. Therefore, investors should
remain vigilant and consider the potential risks
before investing in money market funds.
Social Plugin