UPDATE 1-US money market assets at highest since Feb. -iMoneyNet

Wed Dec 12, 2012 3:42pm EST

* Year-end moves feed flows into money market funds

* Cash from TAG bank accounts add inflows in week

* Assets in institutional government funds fall

By Richard Leong

NEW YORK, Dec 12 (Reuters) - U.S. money market fund assets rose to their highest level since late February in the latest week as investors favored holding more cash at year-end and some prepared for the possible expiry of a federal insurance program on large bank accounts, according to data released on Wednesday.

Money fund assets grew for a fourth straight week, increasing by $8.86 billion to $2.629 trillion in the week ended Dec. 11, the Money Fund Report said.

As the year draws to a close, traders prefer to boost their cash holdings by reducing bets on stocks and other risky assets.

In addition, some corporate traders and cash managers have been withdrawing money from checking accounts in anticipation that an unlimited government guarantee on them will not be extended.

On Dec. 31 the Federal Deposit Insurance Corp was set to terminate its transaction account guarantee, known as TAG. The program insures bank deposits of more than $250,000, the amount the FDIC normally covers, in checking accounts that do not pay interest.

TAG was created in September 2008 during the height of the global financial crisis in a bid to help stabilize the banking system. It was meant to reassure depositors that their money was safe and to ensure that businesses and local governments had access to cash.

The program, which was originally set to end three years ago, has pitted checking accounts used by companies and government agencies against money market funds due to TAG's explicit federal guarantee, analysts said.

On Tuesday, the Senate passed a "cloture vote" by a comfortable margin so it could proceed with developing a bill that would continue TAG for another two years.

Analysts said the renewal of TAG still faces a tough fight among lawmakers because it could worsen the federal deficit. The Congressional Budget Office estimated TAG could add $110 million to the deficit over 10 years.

Most analysts said the best shot that TAG will live on is an attachment to the deal on the U.S. budget if it is reached by year-end.

"We still believe there is a good chance that the coverage will expire as scheduled," Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch, wrote in a research note published late on Tuesday.

MOST FUND ASSETS RISE AGAIN

Total taxable money market fund assets rose by $5.93 billion to $2.353 trillion, while overall tax-free assets were up by $2.92 billion to $275.72 billion.

Most fund categories - tracked by the Money Fund Report, published by iMoneynet - experienced asset increases in the latest week.

The biggest increase occurred among prime institutional funds, which can invest in commercial paper and other slightly riskier investments than U.S. Treasuries. Their assets grew by $5.82 billion in the latest week to $993.48 billion.

The only asset decline was among institutional government money funds whose assets fell $2.43 billion to $663.3 billion.

Yields on taxable and tax-free money market funds were unchanged from the previous week at 0.02 percent, according to the report.

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