With $2.6 Trillion, Money Funds Prepared for Debt-Cap Feudby
The 2013 and 2011 U.S. debt-ceiling episodes serve as guide
Bill rates fall Monday on reports of borrowing-extension talks
While U.S. lawmakers have been negotiating over the nation’s debt ceiling, the $2.6 trillion money-fund industry has been preparing for months in a bid to spare investors the angst and volatility seen in 2011 and 2013.
The White House and top lawmakers from both parties reached an agreement Monday in Washington to avoid a U.S. default. Firms such as Federated Investors Inc., J.P. Morgan Asset Management and Pacific Investment Management Co. have factored the prospect of a standoff and last-minute deal into their investment calculus since March, when the latest extension to the borrowing limit expired.
Their efforts, including educating clients, trimming securities potentially at risk and stocking up on easier-to-trade debt, are paying off, limiting the exodus from their funds. Assets in money funds that focus on U.S. Treasuries rose $1.72 billion in the seven days ended Oct. 23, according to Crane Data LLC. In contrast, daily outflows in the lead-up to the October 2013 debt-cap standoff eclipsed $7 billion, and reached $9.4 billion on July 29, 2011, just before lawmakers increased the limit on Aug. 2.
“This time it’s more about less panic and more preparation,” said Gregory Fayvilevich, an analyst in the fund and asset management group at Fitch Ratings in New York.
The accord reached Monday will extend the government’s borrowing authority until March 2017 and also include a two-year deal on spending, aides from both parties said. House and Senate Republican leaders presented the plan to members Monday night and a draft of the bill was later posted on the White House website.
Dimming concern that funds would have to dump Treasury bills if there was a default or payment delay, taxable money funds that invest in government and company debt hold only about one percent of assets in Treasury bills maturing around Nov. 12, according to JPMorgan Chase & Co. data.
The relative calm is apparent in the market for the government’s shortest-maturity obligations. Rates on Treasury bills maturing in mid-November rose to a seven-month high last week. In 2013, one-month bill rates set a five-year high.
Treasury Secretary Jacob Lew this month moved up by two days to Nov. 3 the date when lawmakers must raise the borrowing capacity or risk that his department can’t access debt markets because it would be at the $18.1 trillion statutory borrowing limit.
Bill rates dropped Monday, with the rate on those maturing Nov. 12 falling to about 0.06 percent from 0.14 percent Oct. 23. The Obama administration and bipartisan leaders in Congress are working on a plan to extend the borrowing authority along with a two-year spending agreement, according to congressional aides in both parties.
In 2013, an 11th-hour deal reopened the government following a 16-day partial shutdown. On Oct. 17, the day Lew said borrowing capacity would expire, President Barack Obama signed legislation to suspend the debt ceiling. In 2011, congressional wrangling over raising the ceiling was resolved in August, the same day the Treasury was set to lose its ability to borrow.
“We’ve been through these events before,” said Frank Gutierrez, portfolio manager in New York at J.P. Morgan Asset Management’s Global Liquidity Group, which oversees $259 billion in money funds. “Lew moving the date to Nov. 3 naturally moved our conversation to the Nov. 5, 12 and 19 maturity Treasury bills. We have generally avoided adding positions to that range of dates.”
The impasse hasn’t gone by without a hiccup. Last week, Treasury postponed a two-year note auction slated for Oct. 27, the first auction delay in more than a decade.
“There is no doubt in our mind that the U.S. government will continue to perform on its obligations,” said Jerome Schneider, head of short-term strategies at Newport Beach, California-based Pimco, which oversees $1.47 trillion. “But the road to that is going to be a little bit bumpy. We have been preparing for months. For some clients we’ve moved away from owning securities that could have delayed interest payments or even maturity payment.”
Deborah Cunningham, chief investment officer for global money markets at Federated Investors, with $208 billion of money funds, doesn’t see any issue in owning November bills. Yet the company is backing away from some November Treasury notes amid concern there may be difficulty entering and exiting positions in those securities.
“Our ultimate conclusion is not that the Treasury will default or even have a technical default issue,” said Cunningham, who’s based in Pittsburgh. Our focus is “to maintain the liquidity we need to deal with the perception of that -- that might come from our underlying shareholders. We have been positioning our portfolios for just this potential since way back in the spring.”
Some funds have a bigger allocation than others to government obligations coming due next month.
For the $9.3 billion Vanguard Admiral Treasury Money Market Fund, 44 percent of its Treasury securities mature in November, according to Crane data tracked by Fitch. In comparison, the average Treasuries-only fund has 11 percent maturing in November, according to Fitch’s analysis of 49 funds overseeing a combined $495 billion.
“The U.S. has faced ceiling deadlines in the past and Vanguard continues to closely monitor the situation in Washington,” David R. Hoffman, spokesman for Valley Forge, Pennsylvania-based Vanguard Group Inc., said in an e-mail. “We remain confident in the prudent and conservative approach to managing our money-market funds.”
A dearth of available bills has also helped keep rates steady as the Treasury has slashed issuance to stay under the debt cap.
“The reaction this time is so far much less acute than in the previous two debt-limit episodes,” said Peter Crane, president of Crane Data, a Westborough, Massachusetts-based firm that tracks the industry. “There has yet to be any noticeable outflow.”