The debt ceiling and money market funds
On Wall Street, Treasuries function like a currency, and investors often use these bonds, which are supposed to be virtually fail-proof, as security deposits in their trading in the markets. Now, banks are sifting through their holdings and their customers’ holdings to determine if these security deposits will retain their value. In addition, mutual funds — which own billions of dollars in Treasuries — are working on presentations to persuade their boards that they can hold the bonds even if the government debt is downgraded. And hedge funds are stockpiling cash so they can buy up United States debt if other investors flee.
The Economist also has an article on the subject in this week’s edition. As we’ve written before, it’s hard to predict the unprecedented, but the main problem probably lies in the $4,000bn or so of US Treasuries used as collateral in the futures, OTC derivatives and repo markets.
There’s confusion about what the money market funds can and would (a very important distiction — see below) do should there be a downgrade of the US credit rating. The NYT article doesn’t really enlighten us here — it quotes one MMF manager, Deborah Cunningham of Federated Investors in Pittsburgh, as saying it’s unclear where investors could turn.
In a mostly phlegmatic note, Wells Fargo’s Economics Group argues that the funds that would have What About Entities Tied by Prospectus to a AAA Rating? Another concern regarding a downgrade of U.S. government debt is that such an action would cause forced selling of Treasuries at institutions that are required by prospectus to hold AAA-rated securities in fixed-income portfolios. This worry may be a bit overblown in our view. Mutual funds collectively hold about 7 percent of outstanding Treasury securities. We reviewed the prospectuses for U.S. government bond funds at some of the country’s largest mutual funds and found that in many cases there are no such mandates, at least not to the extent that a downgrade of U.S. government debt would cause of tidal wave of U.S. government debt to hit the secondary market. More often than not, the investment mandates stipulate that the assets of funds must be invested in bonds that are “backed by the full faith and credit of the U.S. government,” but do not have specific guidelines about third-party credit ratings. Among the largest public pension funds in the United States, the verdict is mixed regarding which funds would be forced to sell Treasuries in the event of a rating downgrade. Even so, federal, state and local retirement funds hold only around 3 percent of the outstanding U.S. government debt, so any forced selling at public retirement funds would likely have a negligible effect on the broader market for Treasuries.
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In a mostly phlegmatic note, Wells Fargo's Economics Group argues that the funds that would have to sell US Treasuries are a relatively small share of the creditors, and because there's nowhere else to turn (are Bunds really a safer haven at the moment
Collectively, these teams comprise the management structure responsible for the full suite of Wells Fargo Advantage Dow Jones Target Date Funds. Wells Fargo was one of the first to offer a target date product as a mutual fund with the introduction of
When Bank of America reported close to a $9 billion loss, the mutual funds and small investors started selling. This is exactly the right time to do the opposite and buy. Sure enough, the stock reversed yesterday, and soared on Wednesday.
Wells Fargo Advantage Global Opportunities A (EKGAX) invests the majority of its assets in small and mid-cap companies which are included in the S&P Global Small/Mid Cap index. The fund invests in at least three countries including the US at any given
pension funds and mutual funds might be forced to dump their Treasury holdings. But the problem with trying to prepare for default in a meaningful and specific way is best summed up by the CFO of Wells Fargo (which is stockpiling cash just in the
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