December 5, 2012 / 10:56 PM / 6 years ago

UPDATE 1-US money fund assets highest since March-iMoneyNet

* Possible end of a guarantee program seen spurring move

* Yield on tax-free funds edge up in the latest week

By Richard Leong

NEW YORK, Dec 5 (Reuters) - U.S. money market fund assets rose to the highest level since March as some investors prepared for the possible expiration of a government guarantee program on large business checking accounts held at banks, according to a report released on Wednesday.

Money market fund assets increased for a third consecutive week, growing $26.27 billion to $2.620 trillion in the week ended Dec. 4, the Money Fund Report said.

On Dec. 31 the Federal Deposit Insurance Corp was set to terminate its “Transaction Account Guarantee” or 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 back in September 2008 during the height of the global financial crisis and was intended to help stabilize the banking system as traders were scared about the collapse of Lehman Brothers which roiled financial markets. TAG was meant to reassure depositors that their money was safe and to ensure that businesses and local governments had access to cash.

TAG was originally scheduled to end in December 2009, but it was extended for another three years.

This program has pitted checking accounts used by companies and government agencies against money market funds due to TAG’s explicit federal guarantee, analysts said.

Given the low interest rate environment, many businesses and government agencies have preferred the safety of bank accounts over money funds, analysts said.

Without the guarantee, big checking accounts and money market funds will likely be perceived as similar in terms of safety. Moreover, large investors will likely seek to diversify their cash away from bank checking accounts if the guarantee expires, analysts said.

There has been some effort in Washington to extend TAG again, but it is unclear whether that will succeed, they said.

In light of this uncertainty, some large holders might be pulling cash from their checking accounts and socking it away in money funds.

“It could be anticipation of the FDIC insurance lapsing at year-end. Perhaps it was time for them to put some cash back into money market funds,” said Jim Lee, head of short-term markets and futures strategy at RBS Securities in Stamford, Connecticut.

Taxable money market fund assets rose by $25.52 billion to $2.347 trillion. Institutional taxable fund assets rose $15.54 billion, while retail taxable assets added $10.8 billion, according to the report, published by iMoneyNet. Tax-free assets were up by $757.5 million to $272.80 billion.

Yields on taxable money market funds were unchanged from the previous week at 0.02 percent, while yields on tax-free funds edged up to 0.02 percent from 0.01 percent the prior week, according to the report.

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