BlackRock’s Money Funds Have Sold Vulnerable Treasuries

BlackRock Inc. joined the two biggest providers of money-market mutual funds in reducing holdings of the riskiest U.S. Treasury maturities as investors stepped up withdrawals across the industry.

BlackRock, the world’s largest asset manager, today followed Fidelity Investments and JPMorgan Chase & Co. in declaring its money funds free of the debt most likely to be affected by a default as the U.S. government approaches its borrowing limit. Investors pulled more cash yesterday from institutional government-only money funds than in any day in more than two years, according to research firm Crane Data LLC in Westborough, Massachusetts.

“We continue to take prudent actions in preparation for all potential outcomes, despite our belief that Congress and the president will likely act to prevent a U.S. default,” Tara McDonnell, a spokeswoman for New York-based BlackRock, said today in an e-mailed statement.

President Barack Obama and House Republican leaders moved yesterday toward an agreement to extend the nation’s borrowing authority as they remained at odds over terms for ending the partial government shutdown. House Speaker John Boehner of Ohio yesterday said he would offer as soon as today a measure to postpone a potential U.S. default to Nov. 22 from Oct. 17.

‘Big Drop’

Assets in U.S. money funds that buy almost exclusively debt backed by the federal government fell by $7.4 billion yesterday, or 2.3 percent, the largest decline since July 29, 2011, shortly before a resolution to the last debt ceiling crisis. Investors withdrew $9.4 billion on that day, according to Crane Data.

“It’s definitely a big drop,” Peter Crane, president of Crane Data, said in an e-mail. “A debt deal can’t happen soon enough at this point. A few more days of this and you’ll begin to see forced selling” of assets by money funds.

Assets in all U.S. money funds fell $28.7 billion, or 1.1 percent, in the past seven days, according to the firm’s data.

Money funds can cope with a short-term default in U.S. Treasuries as long as it doesn’t trigger significant investor flight, Fitch Ratings said in an Oct. 9 report. Fitch cited evidence that fund companies had reduced holdings in maturities most likely to be affected by a default and had boosted their level of assets that could be quickly converted into cash and returned to withdrawing investors.

Federated Investors

“We have not seen unusual increases in redemptions,” BlackRock’s McDonnell said. “We have been in communication with our clients to ensure they understand our approach.”

The week’s exodus is a fraction of the $310 billion pulled from money funds in the week after Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008, causing a loss at the Reserve Primary Fund and setting off a panic that helped freeze global short-term debt.

Federated Investors Inc., the third-biggest provider, said it stuck with maturities other firms were selling, convinced that the White House and Republicans would reach a deal to avert a default.

“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 McAndrew, a Federated spokeswoman, said in an e-mailed statement yesterday.

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. About $74 billion in Treasuries held by money funds matures from Oct. 24 to Nov. 15, Crane Data estimates.

Money-market funds give millions of households, companies and other institutions a low-risk parking spot for cash and channel $2.6 trillion to issuers of short-term debt including the U.S. government, financial institutions and other corporations.

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