Money Market Funds and the Prospect of a U.S. Treasury Default

Quarterly Journal of Finance, Forthcoming

45 Pages Posted: 23 Aug 2015 Last revised: 14 Nov 2015

See all articles by Emily Gallagher

Emily Gallagher

University of Colorado at Boulder - Department of Finance; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Sean Collins

Investment Company Institute - Research

Date Written: August 21, 2015

Abstract

U.S. 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.

Keywords: Money market funds, runs, debt limit, debt ceiling, flight-to-liquidity, deposit insurance, repo

JEL Classification: G01, G18, G23, G28

Suggested Citation

Gallagher, Emily and Collins, Sean S., Money Market Funds and the Prospect of a U.S. Treasury Default (August 21, 2015). Quarterly Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2649231 or http://dx.doi.org/10.2139/ssrn.2649231

Emily Gallagher (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Sean S. Collins

Investment Company Institute - Research ( email )

202-326-5882 (Phone)

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