The Investment Company Institute released a statement on Saturday entitled, "Standard & Poor's Downgrades U.S. Government Debt on the impact of Friday's action, and the mutual fund trade group also published a piece on Thursday entitled, "The Debt Ceiling Debate and Its Impact on Money Market Funds." We excerpt from both pieces below. ICI Senior Director for Policy Writing and Editorial Mike McNamee writes, "On Friday, August 5, Standard & Poor's Corp. downgraded the long-term sovereign credit rating on the United States of America to AA+ from AAA. The agency reaffirmed the U.S. government's A-1+ short-term rating, which is the rating that money market funds use in making their investment decisions. Moody's Investor Services and Fitch Ratings Ltd. have reaffirmed their Aaa and AAA ratings for long-term U.S. government debt."

McNamee continues, "This action by S&P does not change the analysis that ICI has offered in recent weeks on the impact of the U.S. debt and deficit issues on money market funds. In particular, it remains highly unlikely that this downgrade could force a money market fund to dispose of its U.S. government securities or 'break the dollar'."

The piece adds, "For more information on money market funds and the U.S. government credit rating, please see: "It's Highly Unlikely that Money Market Funds Will 'Break the Dollar' in U.S. Debt Crisis," "Frequently Asked Questions About Money Market Funds and Credit Ratings on U.S. Treasury Securities," and "Let's Preserve America’s Financial Standing in the World."

ICI's previous update, "The Debt Ceiling Debate and Its Impact on Money Market Funds," was written by Economists Chris Plantier and Sean Collins. It says, "Data on money market funds flows continue to draw attention, especially with today's report that net outflows totaled $66 billion in the week ending August 3. As ICI Chief Economist Brian Reid explained last week, several factors have been influencing recent flows. His analysis found that the standoff over the U.S. debt ceiling, concerns about Eurozone debt, and recent regulatory changes are among the major factors that could be affecting investors."

The piece continues, "While it's still difficult to sort out which of these factors is having the most impact on the flows during the last three weeks, the weekly and daily data from July 27 to August 3 indicate that uncertainty about the debt ceiling was the primary force affecting money market fund assets during the past week. Taking a closer look at the data -- both ICI's weekly figures and daily numbers from other providers -- offers some indications of the effect of the August 2 deadline for raising the U.S. government's debt ceiling and the tense days of uncertainty that preceded the debt-and-deficit agreement signed by President Obama by the deadline."

It explains, "ICI's weekly data show money market funds held roughly $2.6 trillion in assets as of August 3. That reflects $66 billion in net outflows from all types of money market funds during the past week -- more than is typical at this time of year -- with $77 billion flowing out of institutional money market funds. By contrast, retail money market funds saw inflows of $11 billion in the week ending August 3. It appears that a large amount of this week's net outflow was related to concerns over the U.S. debt ceiling negotiations. That's supported by daily data from Crane Data Money Fund Intelligence for the same week, which show that institutional money market funds posted outflows on July 28, 29, and August 1. These funds then gained small inflows on August 2 and 3 once it was clear that the debt ceiling would be raised." (Crane Data showed very large increases on August 4 and August 5 too.)

Finally, ICI writes, "What might be overlooked in a focus on the data is just how well money market fund managers prepared for and managed another period of market stress. The past week's net outflows amounted to almost 5 percent of the total assets of institutional money market funds. The 2010 SEC amendments to money market fund regulations require funds to hold at least 30 percent of their assets in securities that will be liquid within five business days -- a buffer that makes money market funds much more resilient when faced with redemptions. And money market fund managers have operated their funds above and beyond SEC requirements during this time of potential stress.... In summary, recent money market fund flows continue to reflect the uncertain and fluid nature of U.S. and global markets and events. Throughout this period, money market fund managers continue to manage portfolios to ensure they are positioned to weather these storms."

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