Money funds have biggest redemptions this year amid debt talks

Withdrawals reached $37.5B last week, mostly from institutional funds

Jul 29, 2011 @ 11:32 am

Investors last week pulled more money from money-market mutual funds than any week this year as U.S. lawmakers failed to resolve the impasse over raising the debt ceiling.

Withdrawals reached $37.5 billion, with about 70 percent of the redemptions coming from institutional funds that invest in U.S. government securities, according to data from the Investment Company Institute, a Washington-based trade group.

“This is a unique situation and people are afraid of the unknown,” said Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts-based firm that tracks the $2.6 trillion money-market fund industry. Crane said that last week’s withdrawals, while higher than normal, didn’t indicate panic on the part of investors.

The House of Representatives last night put off a vote on Speaker John Boehner’s plan to raise the $14.3 trillion debt ceiling after the Republican lawmaker failed to win enough support from his own party. The stalemate in Washington has exposed money-market clients to increased danger, including the potential for a missed interest or principal payment on government bonds as well as “incremental weakening” of overall credit quality for portfolios with U.S. government holdings, Moody’s Investors Service Inc. said earlier this week in a statement.

Moody’s placed the Aaa rating of U.S. debt on review for possible downgrade as the Aug. 2 deadline for raising the ceiling approaches.

‘Extremely Remote’ Risk

Concerns about the safety of money-market funds have been overstated, said Brian Reid, the ICI’s chief economist. Low interest rates and lingering concerns about Europe’s debt problems could also be behind the withdrawals from money funds, Reid said.

“I don’t know of any scenario in which money-market funds would be disproportionately affected compared to other market participants by a failure to raise the ceiling,” Reid wrote in an article published yesterday on the ICI’s web site.

U.S. money-market funds held about $760 billion in Treasuries, government-agency debt and repurchase agreements in April, according to New York-based JPMorgan Chase & Co.

Last week’s redemptions were the largest since the week ended Dec. 15, 2010, when investors pulled $37.7 billion from the funds, according to the ICI.

David Glocke, who oversees $163 billion in money-fund assets at Valley Forge, Pennsylvania-based Vanguard Group Inc., said his firm has seen no evidence of withdrawals among the retail customers it serves.

Data from the ICI show virtually all the withdrawals last week were made by institutional investors.

“We don’t expect the U.S. will default on its obligations,” Glocke said in a telephone interview today. He called the risk of default “extremely remote.”

Vanguard holds more mutual-fund assets than any U.S. firm.

--Bloomberg News--

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