It was comparable to the rush out of money funds in September 2008 when one of the largest funds collapsed, leaving investors temporarily unable to access cash and facing small losses on their investments. The debacle marred a near-perfect safety record for money market funds in terms of protecting investors from losses.
There haven’t been any indications that any funds have run into such troubles this time around, with no investment losses or frozen cash.
The outlook brightened when President Obama signed the debt deal into law Tuesday, and Uncle Sam avoided the risk of default. Investors promptly reversed course, depositing a net $6 billion into money funds that day.
It’s expected that investors will continue to seek shelter from the stock market declines driven by recent disappointing economic news, and pour their cash into money funds.
“They have definitely dodged the bigger crisis,’’ says Peter Rizzo, a credit analyst who rates money funds for Standard & Poor’s. “Had the government gone into default, there’s a domino effect that could have occurred.’’
Similar concerns were echoed by Fitch Ratings, which warned last month that a government default could send investors rushing to the exits again.
In turn, that could have forced money fund managers to sell holdings at discounted prices so they could return cash to their investors on demand. Fitch noted that US money market funds hold about $1.3 trillion in government-backed debt, about half of all money fund assets.
Those investments may still leave money funds vulnerable to a potential downgrade of US debt.
If investors react rationally to a downgrade, there should not be a shock to money funds, Rizzo says.
Here are a few basics about money funds, and reasons why investors face low risks in case of a downgrade:
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