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Money Market Funds Should Shrug Off U.S. Downgrade

When Standard & Poor’s downgraded the U.S. government’s credit rating from AAA to AA+, the $2.5 trillion money market fund industry shuddered in sympathy—and many investors who keep substantial assets in money markets worried about whether their cash was safe.

But not a single fund was forced by its investment policy to dump U.S. Treasury holdings—a move that might have put their net asset values under unusual pressure. S&P and the other major credit agencies treat money markets and other relatively short-term obligations separately from debt that takes more than a year to mature. In this case, only the U.S. long-term rating was cut.

As far as money markets are concerned, short-term Treasury debt remains within their top-rated tier. It would have taken a much more severe downgrade—all the way down to A+ on the long-term S&P scale—for short-term Treasuries to fall out of most high-quality money market portfolios. And for now, at least, even the S&P’s worst-case scenario has the long-term U.S. rating dropping just one more step, to AA (still two notches above A+), during the next two years.

Whether that ever happens or not, the U.S. Treasury still carries what money market fund managers consider “minimal” credit risk, which means they can hang on to their Treasury securities. And so far, most large and small investors are holding on as well.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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