Money funds show resilience despite debt fears

Money market funds face uncharted waters if a debt deal is not reached soon in Washington, but Joe Morgan is not ready to abandon ship.

As Chief Investment Officer of Silicon Valley Bank's asset management affiliate, Morgan keeps about $10 billion in money market funds, including $5 billion in government funds loaded with Treasury bills. Silicon Valley Bank is a unit of SVB Financial Group.

But Morgan expects that, even if the government were forced into a technical default, officials would still find a way to pay bondholders. Money fund sponsors, meanwhile, have built up enough liquidity to convince him they could manage, even if other institutional investors yanked money out of the funds.

"Even if you have a run that takes out 40 percent of the assets, it's business as usual" for his money fund shares, Morgan said on Friday.

It's an important view -- and one voiced by several other managers -- as the $2.5 trillion money market mutual fund industry braces itself for the possibility a broad political agreement will not be reached.

In all, the funds hold about $1.3 trillion in Treasuries, agency debt and other securities backed by public institutions that to date have been regarded as safe havens. Many funds could continue to hold the debt even if there was a downgrade, analysts said. But one threat, according to Fitch Ratings, would be if investors rushed to pull money out of the funds because the government stopped renewing maturing securities.

REDUCING WORRIES

However unlikely the chances of that, big money fund sponsors such as Fidelity Investments of Boston and Federated Investors Inc in Pittsburgh have moved to calm investors.

Both companies and others have held meetings with investors and sent out briefing papers. Some such as BlackRock Inc and JPMorgan Chase & Co have also asked clients to reconsider guidelines, such as discussing whether limits on holding debt rated less than AAA should be revised.

A Fidelity spokesman said it has stress-tested its money funds so they can withstand significant market volatility. In an emailed statement, the spokesman also said its money market funds have removed all U.S. Treasuries that mature in the first two weeks of August "to avoid volatility from the deadline" of August 2 in the Washington debt talks.

In addition, Fidelity has raised the cash positions of its Treasury money market funds. Clark Case, the treasurer for the City of Winston-Salem, North Carolina, said the steps convinced him to keep assets in a Fidelity fund.

"I'm not worried about that in the money market at all," he said.

NEVER MIND OUTFLOWS

For the fund companies, the pressure is on. Data from Lipper, a Thomson Reuters unit, show that, for the week ended July 27, investors withdrew $32 billion from money funds, up from $22 billion in the previous week and a turnaround from the $11 billion added the week of July 13.

The outflow was the largest weekly figure since January, although still just a blip of the sector's total assets. Tom Roseen, Lipper's Head of Research Services, said the rising outflows could just reflect seasonal pressures, or the stalemate in Washington.

The largest weekly outflow came in the week of September 17th, 2008, when one of the best-known money funds, Reserve Primary Fund, "broke the buck" and failed to maintain the $1-per-share net asset value many investors expect. Investors withdrew $144 billion from all money funds that week.

"Let's see what happens if the Congress does not pass a meaningful bill by next week," Roseen said.

BACKSTOPS WORKING

One investor prepared to wait and see is Rick Trout, Chief Investment Officer of West Coast Trust in Portland, Oregon. His $600 million portfolio includes around $20 million in money market funds run by managers, including Federated. Federated has reassured him of the funds' resilience, he said.

Besides, Trout said, most investors regard the talk in Washington as policy dispute rather than a question about the government's ability to pay bills.

"The market seems to recognize this as a political event and not related to solvency," he added.