Fidelity Investments, the largest manager of money market mutual funds with over $422 billion, posted an article earlier this week entitled, "Debt-ceiling countdown: We answer your FAQs." The "Fidelity Viewpoints" piece, which includes comments from money fund manager Tim Huyck, says, "Six Fidelity experts weigh in on the outlook and potential implications for investors. Will Democrats and Republicans find common ground on a deficit reduction plan in time to extend the U.S debt ceiling -- and avoid a potential U.S. government default? No one can say for sure, but Fidelity experts strongly believe Congress will ultimately act to avert a default. The questions: when, how, and what it will mean to investors worldwide."

Fidelity asks, "How might this issue impact investments in money markets and money market funds? Tim Huyck, portfolio manager for Fidelity's money market portfolios, answers, "Fidelity believes that the government will ultimately increase the debt ceiling. Nonetheless, we have been preparing contingency plans that relate to how our money market mutual funds are positioned, as well as to our overall operations. I believe Fidelity's money market funds, including our Treasury money market funds, are appropriately positioned for a potential severe disruption in the markets. We have stress tested our money market mutual funds, and we believe they can withstand significant market volatility -- far more than the historical largest one-day move in three-month bills that occurred in the last 40 years."

He continues, "If the United States were to be downgraded to AA from its current AAA rating, money market mutual funds would not be forced to sell their government securities. Indeed, the funds could continue to purchase U.S. government securities, provided that the securities were determined to represent minimal credit risk. Overall, we believe money market mutual funds are more resilient than ever before. Since the changes to money market regulations were implemented over a year ago, these funds have greater liquidity, frequently far in excess of the 10% daily and 30% weekly liquidity requirements, and also maintain shorter weighted average maturities. Money market funds are also much more transparent, prominently disclosing holdings on a monthly basis."

The article also asks, "If the credit rating agencies downgrade the long-term rating would they also downgrade the short-term rating? Huyck says, "The U.S. Treasury has the highest short-term credit rating. Even if the long-term rating were downgraded, we do not expect a downgrade of the short-term rating. Moreover, a downgrade of the short-term rating from the highest category to the second-highest category would have no impact on a money market mutual fund's ability to hold or purchase U.S. government securities."

Fidelity also queries, "If the U.S. government were to default, what would it mean for money market funds? Huyck responds, "If a money market mutual fund held securities on which the U.S. Treasury defaulted on the payment of interest or principal, then the fund would be required to dispose of those securities, unless the fund's board of trustees determines that disposing of the securities would not be in the best interests of the fund and its shareholders. The board may consider market conditions, among other factors, in making that decision. Given that a default would likely result in a significant downgrade, many U.S. government securities would no longer be eligible for money market mutual funds. If the debt ceiling were subsequently raised and the U.S. Treasury was upgraded and determined to represent minimal credit risk, then U.S. Treasuries would again be eligible securities for money market funds."

Finally, the piece asks, "Is my Fidelity money market fund investment safe? The money fund manager comments, "We can state unequivocally that Fidelity's money market funds and accounts continue to provide security and safety for our customers' cash investments. Our funds invest in money market securities of high quality, and our customers have full access to their investments anytime they wish. Most importantly, we have been vigilant in keeping our money market funds safe and in protecting the $1.00 net asset value (NAV), which has always been our No.1 objective in managing these funds."

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