In Brief
U.S. lawmakers have raised or suspended the debt ceiling over one hundred times since WWII and have never failed to lift or suspend the ceiling since its inception. In the unlikely event that the U.S. Treasury exhausts available cash and borrowing authority before Congress takes action, we continue to believe the Treasury would prioritize payment of principal and interest on U.S. Treasury Bills and Notes over other domestic obligations such as government salaries or Social Security benefit payments. This would help facilitate the issuance of new Bills and Notes to redeem maturing securities and pay interest in a timely manner. In any case, we believe a technical default would be short-lived and a very low probability outcome to begin with.
Frequently Asked Questions
Below we address a few commonly asked questions from our recent client discussions, with specific focus on the J.P. Morgan 100% U.S. Treasury Securities MMF (the Fund) which, by prospectus, concentrates its investments in U.S. Treasury Bills and Notes.
J.P. Morgan Global Liquidity’s other Government and Treasury MMFs (U.S. Government Money Market Fund, U.S. Treasury Plus Money Market Fund, and Federal Money Market Fund) are primarily invested in repurchase agreements (repo) and debt issued by government-sponsored enterprises (GSEs) such as the Federal Home Loan Bank System (FHLB). Importantly, our primary repo counterparty in these MMFs is the Federal Reserve Bank of New York (FRBNY). FRBNY is not subject to the debt ceiling and is an independent government agency which is not funded by the public. Therefore, a default by the U.S. Treasury would not impact FRBNY’s ability to make payment at maturity on our repo holdings.
Could the Fund continue to hold a defaulted U.S. Treasury security?
Yes, there is no requirement under MMF regulations (Rule 2a-7) or criteria for the Fund’s AAA ratings that mandate the immediate disposal of a defaulted asset.
Would the Fund have adequate liquidity to meet redemption requests from investors in a default scenario?
The Fund’s Weekly Liquid Asset (WLA) level was 99.97% as of May 19, 2023. The Fund holds 32 unique U.S. Treasury securities, each with a different maturity date, representing a diverse source of liquidity in the event of a default (which would likely only impact a single maturity date for a brief period).
Could the Fund “break-the-buck” in the event of a default?
The Fund’s “shadow” Net Asset Value (NAV), also known as the mark-to-market NAV would need to decline more than one half of one percent (0.50%) for shares to be valued at less than $1.00. For context, even with the current debt ceiling pricing strains in the U.S. Treasury Bill market and over 500 basis points (5.00%) of interest rate hikes from the Federal Reserve, the shadow NAV of the Fund was just 2 basis points (two one hundredths of one percent) below a dollar as of May 19, 2023. A break-the-buck event is extremely unlikely, even under our most severe stress testing scenarios.
What if there was no market (or a very thin/dislocated market) for a defaulted U.S. Treasury security held by the Fund? How would the shadow NAV be impacted?
The Fund’s valuation procedures allow for the use of “fair valuation” methodologies in certain situations, particularly when market quotations are not reliable or readily available or if other circumstances exist that warrant the establishment of an internal fair value. With a U.S. Treasury default being technical in nature (and not a solvency issue) we would expect the Fund to consider using its fair valuation tools.
Could the Fund apply a fee or implement a gate on client redemptions?
No, the Fund is not subject to redemption fees or gates, per prospectus. The introduction of any fee or gate provisions would require a 60-day notice period to investors and J.P. Morgan Global Liquidity has never implemented a fee or gate on any of its MMFs.
Does the Fund have the option to purchase other security types (e.g., U.S. Agency debt or repurchase agreements) as a defensive measure?
No, the Fund is currently required to purchase U.S. Treasury securities exclusively. However, the Fund can hold cash for defensive purposes, and leaving a higher proportion of the Fund in cash for risk and liquidity management benefits is something we would consider under certain circumstances.
Could the Fund’s AAA ratings be downgraded in the event of a Treasury default?
A defaulted U.S. Treasury holding would not lead to a downgrade of the Fund’s AAA ratings in isolation. Furthermore, a downgrade of the U.S. Treasury’s credit rating (as a whole or on a specific defaulted Bill/Note) would be unlikely to push the Treasury’s rating below the required minimum for AAA-rated funds. Even in that unlikely event, cure periods apply under the AAA criteria which would give the Fund time to dispose of the impacted holding, or allow time for the debt ceiling to be lifted.
Please reach out to your J.P. Morgan Global Liquidity representative if you would like further information.