Cash is flowing into short-term U.S. government debt funds at the fastest pace in more than six months, just when you might expect investors to be running for the exits.
Demand is surging even as lawmakers wrangle with a looming debt-ceiling deadline and investors become concerned about the Treasury missing payments on the securities held in most of the funds. More than $75 billion was deposited in government money-market funds in the four weeks ended Aug. 16, compared with outflows of about $18.5 billion from U.S. exchange-traded and mutual funds, Investment Company Institute data show.
Whether investors are seeking a refuge from geopolitical risks or having cold feet over the sustainability of the record rally in stocks, they're benefiting from safeguards put in place in October to prevent a repeat of the run on money-market funds experienced during the financial crisis. The changes prompted a shift of more than $1 trillion to government funds from what are known as prime funds by more risk-tolerant investors in the run-up to the reforms.
“Investors will probably be less concerned and less weary about the gyrations around the debt ceiling and what that might mean for U.S. securities,” said Deborah Cunningham, chief investment officer for money markets at Federated Investors, which oversees $242 billion in money funds.
That wasn't the case in 2013, when money-market funds saw more than $50 billion of outflows as lawmakers pushed the debt limit suspension closer to the date that Treasury said it expected to run out of cash.
In the latest episode, Treasury Secretary Steven Mnuchin said in a letter to congressional leaders last month that it is “critical” the debt limit is raised by Sept. 29; Treasury bill investors see the clock running out sometime around early or mid-October. Regardless, funds like Federated and Invesco are already shunning securities maturing around the deadline.
As of July, taxable money-market funds, which include Treasury funds, held about $679 billion of short-term U.S. government debt. Of that, $111 billion matures in October, or about 11% of all Treasury holdings in the funds and 2% of all government money-market assets, according to a J.P. Morgan Securities note published Aug. 21.
“I'm not frightened by those numbers or scale as we have many options to invest during this general timeframe that people discuss as the problematic time,” said Patricia A. Larkin, chief investment officer of cash investment strategies at Dreyfus Corp. “The Fed's RRP is a very welcome tool from the capacity perspective, especially in a situation like this.”
First introduced in September 2013, the Federal Reserve's fixed-rate overnight reverse agreement wasn't yet a viable alternative for funding during earlier debt-ceiling debate episodes, given the small number of counterparties and a daily cap of $1 billion a day per entity. Now, there's a $30 billion limit for the Fed's 136 counterparties, 102 of which are money-market funds.
For those risk-averse investors, remaining in money market funds may be the best bet since they don't have many options. Banks may be unwilling to take on more deposits as they are near a record $11.8 trillion, according to Fed data since 1973.
“If you have about $2 trillion in government-only money funds and 10% leaves — that's about $200 billion and that has to go somewhere,” said Joseph Abate, a strategist at Barclays Capital. “Does it go to bank deposits? In the past it has gone into bank deposits, at least for the institutional investors. I don't know where they put it all really.”
Bloomberg News
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