The Financial Times writes that the "Debt ceiling fight pushes money market funds to brink," which discusses the latest battle over the debt ceiling, the dramatic shrinkage in Treasury debt and its impact on money market funds. They tell us, "The supply of the safest US government bonds has been cut this month after federal spending limits were reinstated, driving prices higher and reigniting problems for the money market fund industry -- which has already been bailed out by the Federal Reserve once this year. Treasury bills -- US bonds which mature in a year or less -- were already scant this year after the US lengthened the average duration of its new debt issues. Supply then took another hit after Congress failed to pass legislation in July that would have allowed the Treasury department to issue new debt -- known as raising the debt ceiling."
The article says, "Analysts estimate issuance of new Treasury bills has been cut by roughly $900bn so far this year. That limited supply has driven prices higher and yields -- the premium investors are paid to hold the debt -- down to levels just above zero. When some yields turned negative in May, the Fed intervened to put a floor under those rates. But the worsening supply crunch is drastic enough that rates are heading back towards zero despite the Fed's support."
The FT explains, "Rock-bottom yields cause problems for money market funds, a $4.4tn industry that relies heavily on short-dated debt, erasing their profits or forcing them to close their doors to new investors. Money market funds are a linchpin in the global financial system because they are used by investors as a safe place to store cash for short periods."
They quote TD Securities' Gennadiy Goldberg, "Money funds are having trouble making ends meet because of these very low rates. It's not exactly a conducive environment to be a money-market fund unfortunately. As if zero interest rates weren't enough, this is just piling on." The article continues, "That dynamic will only get worse in the next month, said Goldberg. He does not expect the spending limits to be lifted before the end of October at least."
The FT adds, "The Treasury department is not expected to run out of money until late October or early November. After the decline in supply earlier this year drove some short-term rates negative, the Fed backstopped the market by paying interest on money placed in its Overnight Reverse Repo Facility. The facility provides money market funds with an alternative place to park cash, bolstering those short-term interest rates. The problem is that the RRP facility is now consistently being used at record levels, and is approaching the limits put on its usage by the Fed."
Finally, they comment, "The Fed could ultimately raise the counterparty limits on the facility, which could relieve some pressure on the market, an option it signalled it was open to in the minutes from its July policymaking meeting. But because of pandemic-related monetary and fiscal stimulus, there is still an enormous amount of money in the economy chasing too few investments. That is likely to keep yields on bills low and money market funds under pressure."
According to Crane Data's latest Money Fund Portfolio Holdings data (as of 7/31/21), Treasury securities represent $2.057 trillion of the $4.831 trillion in Taxable money market funds, or 42.6% of the total. This is down from a record high of $2.571 trillion (52.6%) in March 2021. Currently, Treasury money funds total $1.210 trillion, while Government money funds total another $2.759 trillion. Though the FT article doesn't discuss it, during previous debt ceiling scares the main concern was of a technical default in Treasuries and the possible flight from Treasury money funds.
Below, we list a number of Crane Data News articles that covered previous episodes of debt ceiling showdowns and their impact on Treasury money market funds. For more, see: "Wells Money Market Funds Debt Ceiling FAQ; Impact on Treasuries, Repo" (9/7/17), "BlackRock on Return of the Debt Ceiling, Avoiding T-Bills in October" (9/5/17), "Treasury Default, Debt Ceiling Concerns Loom; Problem for Govt MMFs?" (8/30/17), "OFR's Berner on Repo, MMFs; Fidelity on Debt Ceiling; Wells on 2016" (1/26/17), "Strategists on Treasury Debt Ceiling; SEC Stats on Liquidity Funds" (10/19/15), "Fed RRP Usage Breaks Record Sept. 30; T-Bills, and Debt Ceiling" (10/6/15) and "Federated's Hill and Cunningham on Debt Ceiling, Fed's Reverse Repo" (2/4/14).
The most acute episodes of these were in 2013 and 10 years ago, in July and August 2011. Our News on these periods includes: "Another Silly MMF Article from FT; Swirsky on Debt Ceiling Lessons" (11/25/13), "Fitch on Fed's Reverse Repos, Bank Support; Wells on Debt Ceiling" (11/13/13), "November MFI Features Debt Ceiling, JPMAM's Donohue, Portal News" (11/7/13), "MMF Assets Surge Following Debt Ceiling Resolution; ICI Blasts FT" (10/25/13), "MMFs See Big Outflows Prior to Debt Ceiling Extension; ICI's Reid" (10/18/13), "ICI, Stevens, Fitch Comment on Debt Ceiling Issues and Treasury MMFs (10/10/13), "October MFI Features Comment Letters, Fidelity's Prior, Debt Ceiling" (10/7/13), "ICI on S&P Downgrade, Reviews Flows During Debt Ceiling Debate" (8/8/11), "Fidelity's Huyck Comments on Debt Ceiling Countdown, Answers FAQs" (8/1/11), "More Debt Ceiling; Reuters Quotes Shapiro on Floating NAV, Europe" (7/22/11), "ICI's McMillan and Reid on Debt Ceiling Scenarios and Impact on MMFs" (7/21/11), "Invesco on Understanding the Debt Ceiling Debate and Money Funds" (7/13/11) and "Federated's Sue Hill Says Don't Sweat The Debt-Ceiling Showdown" (7/20/11).
