Since the US government reached the limit of how much money it can borrow in January, Congress and the White House have needed to work toward a deal to raise the debt limit and avoid a possible default or a downgrade of the government's credit rating.
The prospect of a default or downgrade may raise questions about the debt ceiling and what a default could mean for the cash you hold in money market mutual funds or FDIC-insured bank accounts and certificates of deposit (CDs). Here are some answers to questions you may have.
What is the debt ceiling?
The federal debt ceiling is a limit set by Congress on the amount of money that the US Treasury can borrow to fund the government's operations, including making principal and interest payments on US Treasury securities. If US government national debt levels bump up against the ceiling, then the Treasury Department must resort to other extraordinary measures to pay government obligations and expenditures until the ceiling is raised again. The debt ceiling has been raised or suspended numerous times over the years to avoid a default by the US Treasury on its debt. If no compromise is reached, the government may decide to technically suspend the debt ceiling for a specific period or indefinitely, until an agreement is reached that would reimpose a limit at a higher level.
Does Fidelity believe the US debt ceiling will be raised?
Congress must either raise or temporarily suspend the debt ceiling, with the specific course of action depending on political dynamics and legislative processes.
What can you tell me about the “extraordinary measures” that the Department of the Treasury has taken?
Since January 19, 2023, the US Department of the Treasury has taken “extraordinary measures” as it has in the past, to continue to pay the nation’s bills and extend the nation’s borrowing authority. Examples of extraordinary measures include suspending the sale of state and local government securities, halting contributions to certain government pension funds including the Thrift Savings Plan, and borrowing from money set aside to manage exchange rate fluctuations.
What would be the consequences of a failure by the US Congress to raise the debt ceiling?
By law, once the debt ceiling is reached and extraordinary measures are exhausted, the United States cannot borrow additional money to meet its expenditures. A failure to reach an agreement to raise the debt ceiling before that time could lead to a technical default for the country. This practically results in the US government not being able to make payments on US Treasurys, which could result in market impact. Such a situation could also cause some credit rating agencies to downgrade the ratings on long-term US Treasury debt and inflict broader market volatility.
How safe are money market mutual funds?
Money market mutual funds are a type of fixed income mutual fund that invests in debt securities characterized by their short maturities and minimal credit risk. SEC regulations mandate their quality, liquidity, duration, diversification, and transparency in order to enhance stability and facilitate liquidity. Money market mutual funds are among the lowest-volatility types of investments. However, they do not carry FDIC insurance as do bank money market deposit accounts, CDs, and savings accounts at banks.
Government money funds such as Fidelity® Government Money Market Mutual Fund (SPAXX),* typically invest only in cash, the highest-quality, lowest-risk securities issued by the US government, and repurchase agreements collateralized by cash or US government securities. Treasury and government money market funds are designed to maintain a stable net asset value (NAV) of $1.00.
Retail prime money market mutual funds such as Fidelity® Money Market Fund (SPRXX)**, invest in securities issued by the government as well as short-term securities, such as commercial paper. These funds also offer stable $1.00 NAVs. They differ, however, from government funds in that they can also invest in commercial paper, certificates of deposit, corporate notes, and other private instruments from domestic and foreign issuers, as well as repurchase and potentially reverse repurchase agreements.
Retail tax-exempt municipal money market funds such as Fidelity® Municipal Money Market Fund (FTEXX),** invest in municipal securities and also offer a stable $1.00 NAV.
Are my Fidelity money market fund investments safe, even if the debt-ceiling issue is unresolved?
Fidelity is actively monitoring the ongoing debt-ceiling discussions and positioning our money market funds accordingly. Safety and liquidity have always been, and will continue to be, our top priority objectives in managing money market funds for our customers no matter the market conditions.
Our money market funds are positioned conservatively in light of debt-ceiling risks. Our funds invest in money market securities of high quality and they maintain high levels of liquidity.
Do any Fidelity money market funds have allocations to direct US Treasury holdings?
Current taxable fund allocations to direct US Treasury holdings, if applicable, are available on individual fund pages online.
What would the impact be to money market funds if the US Treasury were to default?
If a money market mutual fund held securities on which the US Treasury defaulted on the payment of interest or principal, the fund would need to sell those defaulted securities, unless the fund’s board of trustees determined that disposing of the securities would not be in the best interests of the fund. The board could consider market conditions, among other factors, in making that decision.
Fidelity’s money market funds are positioned conservatively, considering debt-ceiling risks.
Are there fees or restrictions on my ability to sell my shares of Fidelity’s US Treasury and government money market funds?
No, Fidelity's government and US Treasury money market funds do not employ liquidity gates or fees for redemptions. While SEC reforms make it permissible during periods of extreme market volatility for a fund to impose a fee of up to 2% on redemptions if a fund's weekly liquid assets fall below 30% of total assets, Fidelity will not take such action.
Could Fidelity’s money market funds hold US Treasury debt if the government’s long- or short-term credit rating were downgraded?
Yes, government securities, including US Treasury securities, are permissible investments for money market funds irrespective of ratings.
What is a repurchase agreement, or “repo,” and what is “repo collateral”?
A repurchase agreement is a contract between a buyer and a seller for the sale and future repurchase of securities. On the effective maturity date, the seller repurchases the securities from the buyer, including a premium that is akin to accrued interest. Buying securities via repo agreements, often maturing the next day, is a relatively common practice by money market fund managers since it is generally low-risk and generates short-term income and liquidity for the fund.
Collateral refers to the type of eligible securities subject to the repo agreement. Collateral for Treasury repos is limited to securities issued by the US Treasury, whereas collateral for government repos can include Treasury securities as well as securities issued or guaranteed by government agencies, including, among others, Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. Nontraditional repos involve a wider range of collateral.
If the US is downgraded or defaults on certain of its debt obligations, will Fidelity's money market mutual funds be able to hold repurchase agreements collateralized by US government securities?
Yes, Fidelity’s money market funds would be able to continue to hold repurchase agreements, or repos, collateralized by US government securities. All repurchase agreement, or repo, collateral, including US Treasurys, is marked-to-market daily to ensure the value of the collateral meets the required percentage above the transaction size. In addition, the funds have the right to require their repurchase agreement counterparties to post additional collateral. Most of the repos that Fidelity’s money market funds currently hold have an overnight maturity and the Federal Reserve is the counterparty.
How short is the “short term” of the securities in which money market mutual funds can invest?
The unique rules that govern money market mutual funds require that at least 30% of the fund’s total assets must be invested in weekly liquid assets, which can consist of cash, direct obligations of the US government (such as US Treasury bills), certain other US government agency debt that is issued at a discount and matures within 60 days or less, or securities that will mature or are payable within 5 business days.
For taxable funds, at least 10% of the fund’s total assets must be invested in daily liquid assets, which can consist of cash, direct obligations of the US government, or securities that will mature or are payable within one business day. The remaining investments can be in longer-term issues, provided the overall weighted average maturity of the fund is 60 days or less.
The research pages for Fidelity’s money market funds have charts of the historical percentage of weekly liquid assets and daily liquid assets held by each Fidelity money market fund.
Do Fidelity money market mutual funds carry FDIC insurance?
The US government does not offer insurance on any type of mutual fund. Money market mutual funds, like bond and stock mutual funds, are investments, and, as such, are not guaranteed. It is important that investors understand that. Cash held by investors in new Fidelity brokerage and individual retirement accounts is automatically placed in government money market mutual funds. Cash in existing accounts can also be invested in such money market mutual funds.
What does FDIC insurance cover?
If your cash is in a CD or bank account, the federal government insures up to $250,000 of it, per bank, through the Federal Deposit Insurance Corporation (FDIC).
Can you get more than $250,000 in coverage?
The FDIC's $250,000 insurance limit is per account owner. That means you have up to $250,000 in insurance coverage available at each bank where you have a savings account, CD, or bank money market deposit account. If you have more cash than that, you can deposit it at other FDIC-insured institutions to be fully insured.
How does FDIC insurance work at Fidelity?
Fidelity offers an FDIC-insured Deposit Sweep Program for certain account types: Cash Management1 health savings accounts (HSAs) and most IRAs. Cash balances in the Fidelity FDIC-insured Deposit Sweep Program are swept into an FDIC-insured interest-bearing account at one or more program banks. Deposits swept into the program bank(s) are eligible for FDIC insurance, subject to FDIC insurance coverage limits.
If you utilize the program, your uninvested cash balance is swept to a program bank where the deposit is eligible for FDIC insurance. The program maximizes your eligibility for FDIC insurance by systematically allocating this uninvested cash across multiple program banks. We currently have about 20 banks available for Fidelity Cash Management and IRAs (although new deposits at any point in time are subject to bank capacity limits). Assuming all the banks have available capacity, a customer could have up to $5 million of uninvested cash covered by FDIC insurance.2
You can find details on how your core position is allocated within the Positions tab on Fidelity.com. A Fidelity rep can also help you customize the program banks in your bank sweep account.
In the event that you have more uninvested cash in your account than we can obtain FDIC insurance coverage for, we sweep that additional cash into a money market mutual fund as part of our Money Market Overflow feature.
Fidelity also offers brokered CDs,3 which are issued by banks for customers of brokerage firms. Because the deposits are obligations of the issuing bank, and not the brokerage firm, FDIC insurance applies. This could allow you to obtain even more FDIC insurance coverage in your account since Fidelity offers a continuous selection of CDs from different banks at the same time. Brokered CDs are not limited to clients of brokerage firms; the term “brokered CDs” refers to the fact that a fee is paid for their distribution.
Do stocks have insurance from the federal government?
The FDIC's mission is to insure deposits at banks, not stocks, bonds, or mutual funds. It does not provide insurance against financial losses resulting from changes in the market value of stocks, bonds, and mutual funds.
What else should I know about keeping my cash safe?
We understand the concerns many may have, given the current and evolving environment, and are closely monitoring and assessing this situation to best support our customers. We would like to reassure you that we have a variety of measures and controls in place for supporting customers through all market events.
Is holding cash still a safe strategy for preserving wealth?
While maintaining a large allocation to cash is not a good long-term strategy for most investors, due to the potential impact of inflation, cash held in money market mutual funds has historically provided a cushion against market downturns. For investors who want to earn income while preserving capital, it may still be a good time to consider longer-term CDs, which can provide income through volatile markets.
Fighting fear
To help manage the anxiety and fear that may arise from watching events such as a potential default or downgrade, it's helpful to have a long-term asset allocation plan as part of a broader financial plan. An appropriate asset allocation includes a mix of stocks, bonds, and short-term securities or cash that aligns with your goals, time horizon, and your ability to manage risk. Your plan can help you avoid emotional overreactions to volatility so you can stay on track toward your long-term financial goals.