FDIC Insurance End May Spark Money-Market Turbulence, Pimco Says

A potential flood of cash into the U.S. money markets if unlimited Federal Deposit Insurance Corp. coverage is allowed to lapse in December is creating investor concern and may lower short-term interest rates, according Pacific Investment Management Co.

An emergency 2008 government provision providing unlimited insurance on certain bank accounts during the U.S. financial crisis to help prevent sudden withdrawals will expire at the end of the year unless Congress extends it. There is about $1.4 trillion sitting in banks’ non-interest-bearing transactions accounts holding more than $250,000, the previous insurance ceiling, which would become uninsured in January if Congress doesn’t act, FDIC data show.

“Dec. 31 could likely be a significant pivot point and potential time for turbulence in the short-term markets,” Jerome Schneider, head of the short-term strategies and money markets desk at Newport Beach, California-based Pacific Investment Management Co. wrote in a note posted on its website today. Money-market mutual funds “could be overwhelmed by the approximately $1.4 trillion in previously FDIC-insured deposits looking for a new home.”

Money Flows

The potential inflows related to the lapse of the FDIC unlimited insurance, typical year-end seasonal factors, and a declining supply of securities eligible for money-market funds to invest “could make near-term liquidity even more expensive than it already is,” wrote Schneider, referring to already close to zero rates on many money-market instruments.

The flow of cash into U.S. money markets could heighten the $2.3 trillion money-fund industries’ struggles for positive returns and also hurt savers who have seen diminished payouts from fixed-income investments since the Federal Reserve cut is benchmark overnight rate to almost zero percent in 2008.

The seven-day compound yield of the average taxable money- market fund was 0.03 percent as of Oct. 2, according to IMoneyNet, a research firm based in Westborough, Massachusetts, that tracks money funds.

The FDIC’s expanded deposit insurance is part of the Transaction Account Guarantee Program, known as TAG. Business and trade groups are appealing to Congress for a temporary extension of the unlimited insurance coverage.

“While there is a possibility that the deadline will be extended” before year-end, “we believe given Congressional approval required, such a compromise is unlikely,” Schneider wrote in the note. “First-movers willing to move quickly and look beyond the traditional playbook of money-market funds will likely gain the advantage.”

To contact the reporter on this story: Liz McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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