U.S. Default Poses Minimal Risk to Money Funds, Fitch Says

Rating agency says funds have cut their holdings of the Treasuries that would be most immediately affected.

Money-market mutual funds can cope with a short-term default in U.S. Treasuries as long as it doesn’t trigger the kind of investor run that followed the collapse of Lehman Brothers Holdings Inc. in 2008, according to Fitch Ratings.

The funds have reduced their holdings of Treasuries that would be most immediately affected by the failure of the U.S. to extend its borrowing capacity, and have high levels of short-term liquidity, the ratings company said today in a report and in an interview. Fund managers wouldn’t be forced to sell Treasuries in the event of a default and would be free to continue buying non-defaulted Treasuries, said Roger Merritt, managing director of fund and asset management at Fitch.

‘Simple’ Lesson

Republican lawmakers in Washington have refused to approve new funding for the U.S. government, triggering a partial shutdown of operations since Oct. 1. They have also vowed not to approve an increase in the government’s debt limit unless President Barack Obama and his Democratic Party agree to change the Patient Protection and Affordable Care Act of 2010, known as Obamacare. Treasury Secretary Jacob J. Lew has said “extraordinary measures” to avoid breaching the debt limit will be exhausted no later than Oct. 17.

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