Discussion Paper

Pick Your Poison: How Money Market Funds Reacted to Financial Stress in 2011

Abstract: The summer of 2011 was an unsettling period for financial markets. In the United States, Congress was unable to agree to terms for raising the debt ceiling until August, creating considerable uncertainty over whether the government would be forced to default on its debt. In Europe, the borrowing costs of some peripheral countries increased dramatically, raising questions about the health of some of the largest banks. In this post, we analyze data recently made public by the Securities and Exchange Commission (SEC) to see how the U.S. money market mutual fund (MMF) industry reacted to these stresses. We conclude that MMFs appeared to be more concerned with the European debt crisis because they increased their holdings of U.S. Treasuries and other government securities while decreasing their holdings of financial securities issued by European banks over that period.

Keywords: debt ceiling 2011; money market mutual funds (MMF); European debt crisis; Treasury securities;

JEL Classification: G2; H0;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2013-03-06

Number: 20130306