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Money Funds Get $38 Billion Deposits as Flows Reverse After Debt Agreement

Investors who sought safety in bank accounts during the U.S. debt ceiling debate have begun returning to money market funds and Treasuries.

Money-market mutual funds took in $38 billion in the past three days, according to research firm Crane Data LLC. Deposits from money managers and other clients at custody bank Northern Trust Corp. (NTRS) have subsided since lawmakers agreed to raise the U.S. debt ceiling, said Amy Bickers, a spokeswoman for the Chicago-based company.

The debt ceiling debate, which Congress and the White House resolved the same day the Treasury Department said the government would run out of money, spurred investors to withdraw $103 billion from money market mutual funds in the week ended Aug. 2, according to research firm iMoneyNet. Unusually high cash deposits prompted Bank of New York Mellon Corp. (BK), the largest custody bank, to impose fees of 0.13 percent on some accounts.

“The BNY Mellon situation was definitely exacerbated by the debt ceiling debacle, and we are seeing it reverse itself in the last three days,” Lyman Missimer, head of global cash management and municipals at Atlanta-based Invesco Ltd., said in an e-mail.

The deposits helped push money-market rates, which surged during the debate to raise the federal borrowing cap, below zero percent yesterday. Europe’s sovereign-debt crisis also bolstered U.S. government securities’ appeal as the world’s safest assets.

‘Excess’ Deposits

The cost of one-month repurchase agreements for government- backed mortgage securities has fallen to 17 basis points, after reaching 38 basis points on Aug. 1, the highest since Dec. 29, according to data from ICAP Plc, the world’s largest inter- dealer broker. A basis point is 0.01 percentage point.

BNY Mellon said yesterday it will charge customers with more than $50 million 13 basis points, or 0.13 percentage point, for “excess” deposits after a flight to safety left the bank with elevated cash levels. The fee is intended to help bolster the balance sheet and cover the cost of insuring the deposits, the bank told clients.

When markets stabilize and cash levels drop “it is likely this fee will no longer be necessary,” the bank said.

Heavy deposits at custody banks were “a temporary phenomenon related to the debt-ceiling deal going down to the wire,” Deborah Cunningham, who oversees $266 billion in money market funds at Pittsburgh’s Federated Investors Inc., said in an e-mail.

Returning to Market

Northern Trust experienced a marginal increase in deposits leading up to Aug. 2, and those cash balances have since subsided, Bickers said.

Carolyn Cichon, a spokeswoman for Boston-based State Street Corp. (STT), the third-largest custody bank, and Ron Sommer, a spokesman for BNY Mellon, declined to comment on whether client deposits had subsided.

JPMorgan Chase & Co. (JPM), the second-largest custody bank, has been getting deposits and is trying to direct customers into JPMorgan Asset Management’s money market funds, said a person familiar with the bank, who asked not to be named.

News of BNY Mellon’s decision to impose a deposit fee coincided with a global rout in equities that drove the Standard & Poor’s 500 Index to its worst slump since February 2009. The S&P 500, which tumbled 4.8 percent yesterday, declined 0.1 percent to 1,199.38 today.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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