By Sam Forgione
NEW YORK (Reuters) - U.S.-based money market fund assets recorded their largest one-week decline since August 2011 as investors pulled $43 billion out of fear over a possible U.S. government default, data from Thomson Reuters' Lipper service showed on Thursday.
The outflows from money market funds, which invest in short-term securities such as short-dated U.S. Treasury bills, came ahead of a crucial deadline to raise the nation's $16.7 trillion debt ceiling.
Without a debt ceiling increase, the government would have faced a default on its IOUs, including some of those very same short-term Treasuries held in those money funds, which traders feared would wreak havoc on the global economy.
Late Wednesday, the U.S. Congress passed a deal to prevent the United States from defaulting and end the government shutdown.
It's possible next week some of that money pulled from money market funds will return now that the crisis has passed, but some lasting damage may have been done to investor confidence.
Worries about a default led large money fund operators such as Fidelity, JPMorgan, BlackRock and Pimco to shed their holdings of Treasury bill issues that mature in late October to mid-November. Those bills are most vulnerable if the government were to delay its debt payments.
Yields on one-month Treasury bills jumped to a five-year high of 0.38 percent the day before the debt deal was reached. The political brinkmanship led Fitch Ratings to place the United States' 'AAA' credit rating on watch negative. As yields rise, prices fall.
The outflows marked a big reversal from inflows of $40.7 billion into the typically low-risk funds in the month of September, according to Lipper data also released Thursday.
"Investors were trying to be pro active. They've seen what happens if you wait too long," said Jeff Tjornehoj, head of Americas research at Lipper.
He was referring to the 2008 financial crisis, when the Reserve Primary Fund, a large money market fund, fell below $1 per share following the collapse of investment bank Lehman Brothers, an event known as "breaking the buck."
In September, investors had parked cash in money market funds partly on uncertainty surrounding the looming debt ceiling talks, Lipper head of research services Tom Roseen said.
Investors also committed cash to the funds in September on uncertainty surrounding the Federal Reserve's plans regarding its $85 billion in monthly bond purchases, and a potential U.S. strike on Syria.
While pulling cash from money funds, investors took risk in stocks and poured $12.7 billion into stock funds, marking the biggest inflows into the funds in four weeks as global markets rallied on hopes lawmakers would reach a deal.
"Stock investors were far more confident in a deal," Tjornehoj said. MSCI's world equity index rose 3.2 percent over the week, while the Standard & Poor's 500 rose 3.9 percent.
The big inflows came after investors poured $32 billion into stock funds in September in the wake of the Fed's decision on September 18 to keep its monthly bond-buying unchanged.
In the latest week, investors also pulled $602 million from funds that primarily hold short-term U.S. Treasuries in the week ended October 16, marking the biggest outflows from the funds in seven weeks.
Overall, investors withdrew $1.4 billion from taxable bond funds over the weekly period, marking the third straight week of outflows from the funds. Last month, funds that mainly hold Treasuries had withdrawals of $4.9 billion, marking their fifth month of outflows.
Investors pulled $7.5 billion out of taxable bond funds overall in September, even as Treasury yields plunged after the Fed maintained its stimulus. Riskier high-yield bond funds, however, attracted $4.1 billion in new cash over the month.
Commodities and precious metals funds, which mainly invest in gold futures, had outflows of $744.1 million, their biggest withdrawals in 10 weeks.
On October 10, gold fell 1.5 percent to below $1,290 an ounce as investors' risk appetite grew and bets on safe-havens faded.
The weekly Lipper fund flow data is compiled from reports issued by U.S.-domiciled mutual funds and exchange-traded funds.
The following is a broad breakdown of the flows for the week, including exchange-traded funds (in $ billions):
Sector Flow Chg ($Bil) % Assets Assets ($Bil) Count
All Equity Funds 12.694 0.36 3,635.015 10,351
Domestic Equities 9.812 0.38 2,695.564 7,627
Non-Domestic Equities 2.882 0.32 939.451 2,724
All Taxable Bond Funds -1.450 -0.09 1,602.880 5,124
All Money Market Funds -43.079 -1.83 2,315.347 1,300
All Municipal Bond Funds -1.292 -0.46 278.610 1,398
(Reporting by Sam Forgione; Editing by Kenneth Barry, Bernard Orr and Lisa Shumaker)