Reuters published a story Thursday, "Debt-ceiling debate could put money funds into uncharted waters." It says, "A failure by Washington leaders to raise the federal debt ceiling by next month could test whether new regulations have made money market mutual funds more robust. With $2.7 trillion in assets, money funds play a key role in the financial system as purchasers of corporate and government debt used to fund short-term operations. Some funds' managers were rattled when past debt showdowns cast doubt on the payment schedules of U.S. Treasury securities they held, though investors ultimately stayed with the funds. Now Republicans in the U.S. Congress are once again resisting requests to raise the federal debt ceiling, leading to concerns the U.S. Treasury Department might not have enough cash to make interest payments due mid-November. The Treasury on Thursday decided to postpone a scheduled auction of two-year notes, citing the borrowing limit. The threat of payment interruptions has already caused one-month T-bill rates to jump temporarily. This time, industry analysts say, money funds could face an extra squeeze because of reforms passed in 2014 that have sponsors converting funds into ones that hold more government-backed debt, which in the worst case could lose value if Washington seizes up. More than $200 billion in funds are in the process of conversion, according to Peter Crane, who tracks the money-market industry, potentially shifting assets to the area that could be affected by a protracted debt-ceiling battle. "If you have a debt showdown, the new rules are going to raise the risk," said Crane, publisher of the cranedata.com website. On the other hand the government money funds did not face big withdrawals during prior debt debates, a record Crane said could reduce the stakes for the industry this time around." It continues, "Because investors prefer the fixed value and dislike withdrawal limits, funds including the $116 billion Fidelity Cash Reserves Fund have begun to convert from prime funds into government funds that are limited to the likes of treasuries and debt issued by agencies such as Fannie Mae and Freddie Mac. This potentially exposes more assets to Washington's foibles. As of Sept. 30, the Fidelity fund had 41 percent of its portfolio in U.S. government agency paper, up from 12 percent in June, though it has reduced its holdings of Treasuries to 4 percent from 6 percent in June. Fund analysts say another issue is the leeway given to government fund sponsors on whether to assume new powers to limit withdrawals, which could leave their hands tied in a crisis.... Deborah Cunningham, Federated's chief investment officer for global money markets, said other SEC rules would still enable the funds to limit withdrawals in a crisis.... "The impact of the reforms has not been felt from a supply-demand perspective," Cunningham said. Fidelity spokeswoman Sophie Launay said its policies reflect the preferences of its investors who want access to funds with stable asset values and not subject to withdrawal limits. Of the debt ceiling debate, she said, "We closely follow market events and developments. We are comfortable with the positioning of our money market mutual funds." It goes on, "A problem for any fund manager would be if the value of holdings like Treasury bills declined because of missed government interest payments, said Greg Fayvilevich, a Fitch Ratings director.... "It will be a dilemma," Fayvilevich said. Fitch pointed to the $9.3 billion Vanguard Admiral Treasury VUSXX.O money market fund as one exposed to a debt-ceiling fight, with 44 percent of its portfolio invested in Treasuries maturing in November, including $1.6 billion of notes maturing Nov. 15. Vanguard spokesman David Hoffman said the company is monitoring the situation in Washington, saying: "We remain confident in the prudent and conservative approach to managing our money market funds." For other debt ceiling commentary, see Citi's Hollenhorst and Barclays Abate's most recent weekly updates.

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