Dreyfus published a Q&A and hosted a webinar entitled, "Unpacking the Debt Ceiling," which featured CIO John Tobin and Head of Portfolio Management & Trading Frank Gutierrez. It asks, "How likely is it that the debt ceiling limit will be breached without resolution?" They write, "We believe it is likely that Congress will resolve the current debt ceiling debate. Congress has faced debt ceiling concerns 78 times since 1960 and, in every instance, has raised or suspended the debt limit." (Note: Register and make hotel reservations ASAP for our Money Fund Symposium show, which will be held in just one month, June 21-23, 2023 in Atlanta, Ga!)
The Q&A also queries, "What is the likelihood that a failure to raise the US debt ceiling would result in a technical default?" Dreyfus replies, "We believe a technical default is unlikely as the US government has never failed to raise or suspend the ceiling since it was introduced in 1917. Also, the US Treasury has indicated that, if the debt ceiling is not raised or suspended in a timely manner, they would have the ability to prioritize Treasury principal and interest payments over other non-debt payments to preserve the full faith and credit of the United States. A technical default will have serious ramifications for the US economy and financial markets, very likely pushing Congress to solve the debt ceiling quickly. Even in the worst-case scenario of a default, markets expect that the Treasury would ultimately make investors whole on any missed principal or interest payments."
The piece continues, "How would money market funds handle a technical default of a Treasury held in a portfolio? A technical default would not require the immediate sale of US Treasury or government securities. There are no cross-default provisions on US Treasuries, meaning that a technical default would be security-specific and not applicable to all US government debt. Additionally, money market funds normally carry higher daily and weekly liquidity levels than required by Rule 2a7, which helps cushion net asset value (NAV) volatility and fund liquidity."
It explains, "Further, all government money market funds calculate a 'shadow NAV' each day, which calculates a portfolio's NAV based on mark-to-market pricing and quantifies the impact from any Treasury pricing changes. With the narrow universe of Treasuries impacted by the X date, we don't believe there will be a material impact to shadow NAVs."
Dreyfus also asks, "Are the credit ratings of the US government at risk, and if so, how would a downgrade impact money market funds?" They comment, "The United States is currently rated Aaa/P-1 by Moody's, AA+/A-1+ by S&P, and AAA/F-1+ by Fitch, each considered a high-grade rating. All three rating agencies maintain a stable outlook. The rating agencies view the risk of a technical default by the US as low. There is some variance as to how the rating agencies would address outcomes pertaining to the debt ceiling."
It states, "For instance, Fitch differs from Moody's and S&P in that Fitch would view prioritization of debt service payments over other obligations as being inconsistent with a AAA rating, although the magnitude of such a rating action is expected to be limited. Moody's would classify it as an event of default; however, they indicated that the rating would likely remain close to the highest level based on the expectation that the default would be short-lived with a recovery rate of 100%. Similarly, S&P and Fitch have indicated that they could temporarily assign a technical default rating (SD from S&P or RD from Fitch) if payments are delayed, with ratings returning to a level close to the highest level once the technical default is resolved. Importantly, a technical default would not require immediate sale of US Treasury or US government securities. There are no cross-default provisions on US Treasuries, so a technical default would be security-specific and not applicable to all US government debt."
The piece says, "We do not believe any AAA money market fund is at risk for a downgrade because of a Treasury technical default. In such a scenario, there is no expectation that the ratings on the underlying security would permanently change and/or fall below the threshold of required rating agency minimums. In addition, as outlined earlier, we don't expect that any temporary mark-to-market pricing changes would materially impact overall portfolio pricing sufficiently to put AAA ratings in jeopardy."
It also asks, "Would the Dreyfus Fund Board consider fees or gates for government money funds? Our government and treasury money market funds are not subject to fees and gates. Fund boards can choose to implement fees and gates but must provide a 60-day written notice to current investors. Dreyfus has never implemented fees and redemption gates on its government money market funds."
Dreyfus writes, "Could government money market funds 'break the buck'? 'Breaking the buck' occurs when the mark-to-market value of a fund's NAV drops below $0.9950, or more than 50 basis points below $1.00. We do not believe a short-term technical default would cause any money market fund to break the buck."
They continue, "What steps have we taken to enhance the ability of Dreyfus money market portfolios holding US Treasury or government securities to maintain stable NAVs? Dreyfus money market portfolios continue to maintain stable NAVs with liquidity levels well in excess of the daily and weekly requirements of Rule 2a-7, which is the principal rule governing money market funds. Moreover, our approved repurchase agreement (repo) counterparties are carefully reviewed by our Credit Team, approved by our Credit Committee, and subject to ongoing monitoring. As mentioned previously, we do not have any exposure to Treasury securities maturing in June."
The update adds, "Further, we routinely perform scenario analysis and stress tests on our money market funds against a range of hypothetical events. Our stress-testing practices are designed to assist portfolio managers in positioning portfolios to withstand reasonably foreseeable adverse market scenarios with minimal NAV impact."
Finally, they ask, "How does Dreyfus mitigate the risk of mark-to-market values of Treasury collateral supporting repurchase agreements? Repurchase agreements are a cornerstone of the money markets and facilitate liquidity and late-day trading for money market funds. We maintain repo relationships with highly rated financial institutions, which are approved as counterparties on an unsecured basis, so having collateral pledged in a repo transaction represents an extra layer of security. Should any of the repo collateral decline in value, such as US Treasuries affected by debt ceiling concerns, the triparty custodian is obligated to increase the collateral to fully collateralize the position. Collateral agreements between Dreyfus and the repo counterparty define specifically what collateral is allowed."
