Dispelling Investor Confusion About Money Market "Liquidations" After Treasury Rating Cut Hot

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There's been a little speculation about how "some AAA-rated money markets might now have to sell all their suddenly AA+ Treasury paper."

 

It's not true. 

 

Remember, money market funds only invest in short-term debt, which Standard & Poor's and the other agencies rate on a different scale.

 

And on that scale, the Treasury is still well within the top tier. The choosiest fund managers in the world can decide to scale back their Treasury holdings, but that's their choice.

 

Nobody's being forced to do anything just because the rating changed. And that right there makes all the difference.

 

After all, Treasury funds can still invest in Treasury paper. They're not tied to the rating at all. Treasury is Treasury.

 

For most tax-exempt or other high-quality MMFs, the selling point comes if Standard & Poor's decides to cut an issuer's rating below AA-.

 

That's three steps down from where we are now. It could happen some day, but for right now, S&P is limiting even its "shock" moves to one step at a time.

 

Of course, if investors decide to dump their money markets, these funds will still have to liquidate some of their Treasury holdings to meet the redemptions. But that's another story, and again it's a matter of choice.

 

The Investment Company Institute thoughtfully put together a Q&A on the subject. It's obviously a few days out of date now, but it's still pretty great.

 

They probably wouldn't mind if you pulled the best bits together for a note to your clients.

 

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