We've been getting questions on the debt ceiling recently, and just found another article on the topic. Invesco writes in a recent "Cash Viewpoint" "Understanding the U.S. Debt Ceiling Debate and Its Impact on Money Market Funds." It asks, "What is the debt ceiling?" The piece says, "A statutory limit has restricted total federal debt since 1917.... It is a limit set by Congress on the total amount of debt that the Federal government can have outstanding at any one point in time.... Once the limit is reached, the Treasury has no authority to borrow, meaning it cannot issue new debt in order to meet interest payments and to finance the primary deficit."

Invesco explains, "Even before hitting the debt ceiling on May 16, Treasury Secretary Geithner put into motion a series of measures with the aim of creating breathing room under the debt ceiling until August 2, including suspending investments in and redeeming debt issued to federal retirement funds, and suspending the issuance of State and Local Government Series (SLGS) Treasury securities, thereby bringing the debt back down below the ceiling and allowing the government to continue borrowing. Also helping push the deadline forward is the fact that tax revenues this year were stronger than expected.... Ultimately, however, when all of these measures are exhausted, the deadline cannot be exhausted."

They continue, "If an agreement is not reached to raise the debt ceiling by the August 2 deadline, the U.S Government could be in default if it does not pay the interest coming due on its outstanding debt obligations. It does not mean, however, that the U.S. Government would be insolvent. A 'technical default' means that the Treasury could continue to service its debt, without an increase in the debt ceiling, by rolling over maturities (replacing principal that has come due) and prioritizing the payment of interest for general revenue.... The point is that at the end of the day someone -- be it a debt holder, a social security beneficiary, etc. -- will not get paid by the U.S. Government."

Finally, Invesco asks, "How will the debt ceiling affect money market yields? They answer, "First, let's look at where money market rates are and how they got there. Short-term yields have been trending lower in the weeks leading up to the May 16 deadline as the supply of short-term money market instruments has dried up, especially since the Treasury began rolling back its Supplemental Financing Bill (SFB) program from $200 billion to $5 billion back in Feb. More recently, concerns of an economic slowdown and the introduction of the new FDIC assessment rule on April 1 put additional downward pressure on yields.... In no significant progress is made on raising the debt ceiling by mid-July, Moody's and Fitch rating agencies announced that they would put the U.S. Government debt rating under review for a possible downgrade.... [S]upply constraints are expected to persist in the near future, keeping money market yields low, possibly edging lower. Even following a resolution in which the debt ceiling is raised, it is expected to take several weeks until supply constraints ease as the SFB program resumes."

The article doesn't address the admittedly far-fetched theoretical question of 'What happens to Treasury money market funds in the case of a technical default?' Note that money fund regulations prohibit the purchase of securities not in the highest short-term rating category, but it allows some leeway with securities already held by a fund. Should a default occur, it's possible that Treasury funds would stop buying new securities, and might even consider returning shareholder funds. Finally, note that in the case of a default by the Treasury, FDIC-insured bank products would likely have their implied "ratings" and security called into question, given the Treasury's ultimate backing of the deposit fund and the banking system. (So theoretically, savers might have nowhere else to go.)

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