On Monday afternoon, Federated Investors hosted a call entitled, "Debt Ceiling Implications for Money Market Funds." Sue Hill, Senior VP and Senior PM of Federated's Government Money Market Funds, says, "Washington still thrives on drama and requires it to get anything done.... The media loves drama as well.... The reality is there's still quite a bit of time left in this particular drama, at least by Washington standards.... We've been through this before in the summer of 2011.... It's widely portrayed by the media that the drop-dead date is Oct. 17, but in fact this really isn't the case. Secretary Lew [stated that the] Treasury would have approx $30 billion in cash on hand as of this date.... Early November seems to be the favorite drop-dead date at this point. What is clear is that the 17th is not the drop dead date.... The best course of action for now from a portfolio management standpoint really seems to be to keep calm and carry on."

She continues, "Our approach going into this crisis has been to ensure that our portfolios have ample liquidity in the event that our clients need reassurance that they can have access to their cash in case they need it.... We've done this by striving to have overnight or short-term liquidity [and the flexibility] to sit in actual cash if need be.... Funds that we manage that don't use repo to maintain liquidity through a structured ladder [have had] pretty significant positions maturing.... [Our] Prime fund portfolios are not typical buyers of Treasury and agency paper. As a result, they've escaped the latest trauma, but they're also being managed with an emphasis towards greater liquidity."

Hill explains, "We and others in the industry have experienced what I'll term modest outflows in recent days, primarily out of Treasury and Govt MMFs. This pattern is consistent with the experiences of 2011, but so far has been well below the level of asset outflows during that period. This of course could be because we are, again, still kind of early in this game, but probably is greater attributed to the lack of unlimited FDIC insurance coverage for non-interest bearing DDAs today. Those who manage these types of funds know a change in assets of this size really isn't alarming.... This same group of funds brought in over $30 billion during the last 2 weeks of Sept.... So I'm not saying that government MMFs haven't experienced declines recently, but it's important to understand what factors are at work behind that, and it's relatively modest in the grand scheme of things."

She tells listeners, "We've seen a backup in yields in very short-term T-bills, those with maturities in the Oct.-Nov. timeframe in particular.... This backup was in large part because traditional participants were sitting on the sidelines [in auctions].... Importantly, we also saw non-traditional buyers come into the traditionally too expensive to bother with Treasury market ... once yields got up to a certain level.... Repo markets have been similarly dislocated over this period with a rise in repo rates to about 20 bps retracing to about 12-14 bps on Friday."

Hill comments, "As you've probably gathered, we think the probability of default really is quite low. Let me reassure you though, that we've done extensive contingency planning in the event that the unimaginable were to happen, if that default does in fact occur. First, there will not be a failure to pay on Treasury bills. Because the debt ceiling is the defining constraint towards the Treasury actually raising cash, the simple act of having treasury bills mature on any given day should free up enough room under the debt ceiling for Treasury to reissue these or just roll them over.... There's no doubt that the newly issued bill will come at a high cost ... but the market experience from last week indicates there are buyers willing to come in at a price."

She adds, "So an actual payment default on a Treasury security, if one were to occur, would likely be limited to the interest payment on a coupon-bearing security, an event that would not be desireable but not as disruptive as a missed principal payment. But I want to say very clearly that a technical default on a Treasury security would not pose a threat to a fund's net asset value.... Rule 2a-7 does not force a fund to sell securities that are in default, rather the board of a fund could make the determination that holding onto the security, because payment would be expected in full, would be in the best interest of the fund's shareholders.... [Contrary to Bill Gross' comments], a fund's valuation procedures ... would absolutely permit that board to value the security with an appreciation that full payment is to be expected." She also mentions that SIFMA working to keep defaulted securities tradeable.

Hill says, "The other question I often get is, 'Could market movement result in the fund breaking the buck?' Here I think it's important to look closely at the extreme market movements of the past week and look at how really small the price impact has been.... All things being equal, a fund with a 60 day average maturity could withstand a 300 basis point instantaneous upward shift in rates before the NAV of the fund would be called into question. So the market moves we've seen over this past week are really literally just fractions of that. So if the NAV is not affected either by default or market movements, then this really comes down to an excercise in liquidity.... As long as funds take the appropriate steps, which we have and which I think others in the industry have ... I'm confident we'll all be looking back at this latest episode as a textbook example of why the current regulations for money funds really do in fact work."

She adds, "Finally, I'd be remiss if I didn't comment on the actions that some of my competitors have rather publicly announced in recent days with respect to the disposing of securities in the late October to early Nov. timeframe. I can only assume that these fund companies they made the choices they did for investment reasons rather than for marketing purposes.... I'd like to thank all of you ... who have taken the time to understand the reality behind the headlines in this particular manufactured drama. As I've outlineed before, managing to a particular date that has not been clearly-defined really creates its own set of challenges.... To chase this date during the more recent market turmoil really does not seem to be particularly prudent."

Finally, Hill says, "We do in fact own some Treasuries within that timeframe selected, but not [in] all of our portfolios.... To date, we're comfortable with how things are playing out in Washington and confident we have the liquidity and fund positioning to manage through this time period. Furthermore, we know that Oct. 17 is not the date, and that Treasury bill maturities free up space under the debt ceiling for new auctions. The headlines in the media will of course suggest otherwise and Washington will as always lean towards the dramatic. Let me assure you though that we always have your best interests at heart, and should this conflict really shift from the media and political circus that it seems to be to being a real threat, that we still have the time and flexibility to take whatever steps are appropriate to protect those particular interests."

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