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Money Market Funds and the Prospect of a US Treasury Default

Author

Listed:
  • Emily Gallagher

    (Paris School of Economics, Centre d’Economie de la Sorbonne, and the Investment Company Institute (ICI), 1401 H St. NW, Suite 1200, Washington, DC 20005, USA)

  • Sean Collins

    (Industry and Financial Analysis, Investment Company Institute (ICI), 1401 H St. NW, Suite 1200, Washington, DC 20005, USA)

Abstract

US debt ceiling crises in 2011 and 2013 were marked by significant outflows from money market funds (MMFs). This study evaluates the behavior and motivations of investors redeeming from MMFs during these crises. We find that the majority of redemptions reflect a generalized flight-to-liquidity and are, therefore, primarily a function of the liquidity needs of a fund’s investor base. Funds holding Treasury securities at greatest risk of default or with market values below their $1 share price experience flows that are insignificantly different from other funds, all else equal. We also find evidence that a significant portion of the outflows stem, not from liquidity concerns, but from an opportunistic yield play on the repo market created by the crises. Finally, we offer anecdotal evidence that the government’s guarantee of bank deposits had the perverse effect of encouraging outflows from MMFs during the 2011 crisis.

Suggested Citation

  • Emily Gallagher & Sean Collins, 2016. "Money Market Funds and the Prospect of a US Treasury Default," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-44, March.
    • Handle: RePEc:wsi:qjfxxx:v:06:y:2016:i:01:n:s2010139216400012
    DOI: 10.1142/S2010139216400012
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    References listed on IDEAS

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