August 2, 2011 / 10:01 PM / 8 years ago

Money fund managers breathe easier on debt deal

BOSTON (Reuters) - Pressures on money-market mutual funds have ebbed now that a deal to raise the federal debt ceiling has been reached in Washington, fund industry executives said on Tuesday.

“A lot of the uncertainty was just cleared up, so that’s a positive,” said John Donohue, Chief Investment Officer for money market funds for JPMorgan Chase & Co’s asset-management arm.

He and others expressed confidence money that left the funds because of the recent uncertainty would return.

Money-market funds are crucial to the U.S. financial system because they buy short-term Treasury and corporate securities that grease the wheels of government and finance.

If too many frightened investors redeem shares, funds have to raise cash by selling the securities and would not buy new issues.

Like competitors, Donohue’s firm reduced the weighted average maturity of securities — the length of time until the securities mature or are redeemed by issuers — held in prime money funds to around 30 days. That includes JPMorgan Prime Money Market Fund, the industry’s largest, with $123 billion in assets as of June 30.

In a telephone interview, Donohue said he expects the figure to rise closer to 40 days soon. And while it is still possible agencies could lower their rating on U.S. debt, he said in a follow-up e-mail: “We don’t feel a downgrade to AA would really change anything for money funds.”


Just how long money funds are willing to hold securities such as Treasuries is an important measure of investor confidence, which dropped last month as politicians debated raising the federal government’s capacity to borrow money.

In all, money funds hold around $1.3 trillion of Treasuries and other government instruments. Redemptions rose recently on concerns a government default of some type could interfere with payments to bondholders.

Data from Lipper, a Thomson Reuters unit, showed that, for the week ended July 27, investors withdrew $32 billion from money funds, up from $22 billion withdrawn in the previous week.

Meanwhile, funds built up cash holdings and shortened the maturities of the securities they held. While cutting into their already low yields, the steps were meant to boost confidence and prevent runs by hair-trigger institutional investors.

How investors view Treasuries is just one of many questions facing money market funds. Some of the largest required massive support from their sponsors during the financial crisis to maintain the $1-per-share net asset values many investors demand.

In response, regulators put new restrictions in place on the funds’ holdings and are debating additional changes, such as proposals to allow the funds’ net asset values to “float” away from $1 per share.


New data will not be available until Thursday, but at first glance, the debt deal seems to have broken the outflows.

“Investor concerns have certainly lessened considerably,” said Sue Hill, senior portfolio manager for Federated Investors Inc in Pittsburgh.

Hill said flows within the company’s money funds had returned to “typical” levels since Monday after the outlines of a deal were announced.

“We’re glad to have this deal signed,” she said.

Federated also reduced maturities and increased liquidity. Hill said it is too soon to say both would return to previous levels, a decision that depends on factors such as the economic outlook in the U.S. and Europe.


David Glocke, who manages Vanguard Group Inc’s Prime Money Market Fund, with $112 billion in assets as of June 30, said Europe’s debt issues seem to him a bigger problem than the wrangling over U.S. debt payments.

He also said a ratings downgrade on U.S. debt would not have an impact on his fund, which would still be permitted to hold Treasuries. There are no securities that can be substituted for the Treasuries.

“It’s the deepest, most liquid market on the planet,” he added.

As manager of a fund focused on retail investors, Glocke said he faced less pressure on outflows than peers with more institutional clients. Still, to avoid volatility, he structured his portfolio away from Treasuries that matured this week. Glocke could not discuss exactly how he planned to respond to the debt agreement signed in Washington on Tuesday.

But he added that, based on their yields on Monday, “there was a lot of value in U.S. Treasury and agency securities.”

Reporting by Ross Kerber; editing by Andre Grenon

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