JPMorgan Says Money Funds Sold Default-Threatened Debt

JPMorgan Chase & Co. (JPM), the second-biggest provider of U.S. money-market mutual funds, said those products had divested of U.S. Treasuries that mature between Oct. 16 and Nov. 6.

The company said it took the action, which also applies to funds with scheduled coupon payments during the period, to help maintain the products’ stable $1 a share value. The funds have also increased their levels of liquidity, the New York-based company said today in a statement, without providing details.

“Although JPMorgan Investment Management continues to believe that the probability of a U.S. government default is low, it has taken certain precautionary measures with respect to the money markets,” the company said.

House Speaker John Boehner today proposed a plan that would push the limit for U.S. borrowing to Nov. 22 from Oct. 17. The White House endorsed the short debt-limit increase with no policy conditions attached. Treasury Secretary Jacob J. Lew warned that “uncertainty” over the debt limit is starting to stress financial markets, speaking in testimony to the Senate Finance Committee.

U.S. money funds held about $475 billion in Treasury securities as of Aug. 31, and an additional $156 billion in repurchase agreements collateralized by Treasuries, according to research firm Crane Data LLC in Westborough, Massachusetts. About $74 billion in Treasuries held by money funds matures from Oct. 24 to Nov. 15, Crane Data estimates.

Fitch Report

Money funds can cope with a short-term default in U.S. Treasuries as long as it doesn’t trigger the kind of investor run that followed the collapse of Lehman Brothers Holdings Inc. in 2008, Fitch Ratings said in a report yesterday.

Fitch based its conclusion partly on evidence that fund companies had reduced holdings in maturities most likely to be affected by a default and had boosted the level of assets that could be quickly converted into cash and returned to withdrawing investors.

Institutional investors in money-market mutual funds that focus almost exclusively on Treasury securities and other debt backed by the U.S. government withdrew $17.5 billion in the seven days through yesterday, according to Crane Data. That’s about 2.6 percent of assets in those funds.

Fidelity Investments, the Boston-based company that is the largest U.S. money-fund manager, said earlier this week that it had moved out of Treasuries maturing in late October and early November.

Fund provider Federated Investors Inc. (FII), based in Pittsburgh, said it wasn’t avoiding that time period.

‘No Threat’

“We continue to hold Treasury securities that mature in the upcoming weeks and are confident that they represent no threat to the liquidity or stability of the portfolio,” Meghan McAndrews, a Federated spokeswoman, said today in an e-mailed statement. “We believe that, at the end of the day, the parties in this conflict will come to a resolution that will prevent the U.S. government from defaulting on its obligations.”

Vanguard Group Inc., the Valley Forge, Pennsylvania-based fund company, doesn’t expect a default, Chief Executive Officer William McNabb said today in an interview on Bloomberg Television.

“Within the walls of Vanguard, we continue to be optimistic about cooler heads prevailing,” McNabb said. “The idea that the U.S. would actually default on Treasuries seems almost unfathomable to us.”

Funding Standoff

Republican lawmakers in Washington had vowed not to approve an increase in the government’s debt limit unless President Barack Obama and his Democratic Party agree to change the Patient Protection and Affordable Care Act of 2010, known as Obamacare. They have also refused to approve new funding for government operations, triggering a partial government shutdown since Oct. 1.

Money-market funds give millions of households, companies and other institutions a safe parking spot for cash and channel $2.6 trillion to issuers of short-term debt including the U.S. government, financial institutions and companies. A run on funds that hold corporate debt after the collapse of Lehman Brothers in September 2008 helped freeze global credit markets.

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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