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
Date Written: August 21, 2015
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: Suggested Citation