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NEW YORK (Reuters) - U.S.-based money market fund assets recorded their largest one-week decline since August 2011 as investors pulled $43 billion out of fear over a possible U.S. government default, data from Thomson Reuters' Lipper service showed on Thursday.
The outflows from money market funds, which invest in short-term securities such as short-dated U.S. Treasury bills, came ahead of a crucial deadline to raise the nation's $16.7 trillion debt ceiling.
Without a debt ceiling increase, the government would have faced a default on its IOUs, including some of those very same short-term Treasuries held in those money funds, which traders feared would wreak havoc on the global economy.
Late Wednesday, U.S. Senate leaders announced a deal to prevent the U.S. from defaulting and end the government shutdown on October 16.
It's possible next week some of that money pulled from money market funds will return now that the crisis has passed, but some lasting damage may have been done to investor confidence.
Worries about a default led large money fund operators such as Fidelity, JPMorgan, BlackRock and PIMCO to shed their holdings of Treasury bill issues that mature in late-October to mid-November. Those bills are most vulnerable if the government were to delay its debt payments.
Investors also pulled $602 million from funds that primarily hold short-term U.S. Treasuries in the week ended October 16, marking the biggest outflows from the funds in seven weeks.
"Investors were trying to be pro active- they've seen what happens if you wait too long," said Jeff Tjornehoj, head of Americas research at Lipper.
He was referring to the 2008 financial crisis, when the Reserve Primary Fund, a large money market fund, fell below $1 per share following the collapse of investment bank Lehman Brothers, an event known as "breaking the buck."
Overall, investors withdrew $1.4 billion from taxable bond funds, marking the third straight week of outflows from the funds.
Investors poured $12.7 billion into stock funds, meanwhile, marking the biggest inflows into the funds in four weeks as global markets rallied on hopes lawmakers would reach a deal.
"Stock investors were far more confident in a deal," Tjornehoj said. MSCI's world equity index rose 3.2 percent over the week, while the Standard & Poor's 500 rose 3.9 percent.
Commodities and precious metals funds, which mainly invest in gold futures, had outflows of $744.1 million, their biggest withdrawals in 10 weeks.
On October 10, gold fell 1.5 percent to below $1,290 an ounce as investors' risk appetite grew and bets on safe-havens faded.
Reporting by Sam Forgione; Editing by Kenneth Barry, Bernard Orr