Money market funds see $103-billion outflow amid debt drama

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Big investors’ fears over the federal debt-ceiling drama triggered a near-record outflow of cash from money market mutual funds over the last week.

Apparently worried that some money funds could suffer losses if the Treasury defaulted on some of its debts, investors yanked a net $103.2 billion from the funds in the seven days ended Tuesday, data tracker iMoneyNet Inc. said.

That was close to the record $120.4 billion that exited the funds in the week ended Sept. 23, 2008, amid the financial system collapse.

On a percentage basis, this week’s decline was larger -- amounting to 3.9% of total fund assets of $2.63 trillion. The 2008 outflow was 3.5% of assets at the time.

Almost all of the money that left the funds this week was pulled by institutional investors, not individuals, iMoneyNet data show.

“It was a direct result of the debt ceiling debate and fear of default,” said Pete Crane, head of money-fund research firm Crane Data in Westborough, Mass.

But with the debt ceiling lifted after an 11th-hour compromise in Congress, cash began to flow back into money funds on Tuesday, Crane said.

Where did the money go when it left the funds? “Banks no doubt were the main beneficiaries,” Crane said.

Because banks can offer unlimited federal deposit insurance on non-interest-paying business accounts, institutional investors could easily park cash in those accounts with no risk of principal loss.

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-- Tom Petruno