News Archives: July, 2025
Allspring's Global Liquidity Solutions Team recently refreshed the publication, "The Debt Ceiling - Frequently Asked Questions." The piece states, "We preface our discussion of the debt ceiling with the belief that the likelihood of one or multiple technical defaults due to a protracted debt ceiling debate is remote. In the unlikely event of a technical default, we believe it will be short-lived and that, upon resolution, funds are likely to be unaffected. We further believe that, given evidence of preplanning, the Federal Reserve (Fed) would be prepared to act if necessary to calm government markets and ensure their smooth and orderly functioning. While no one knows what a government default situation would look like, we can offer opinions based on our research." (Note: Thanks once more to those who attended our Money Fund Symposium in Boston last week! Attendees and Crane Data Subscribers may access the recordings and MFS Conference Materials here.)
It explains, "Past experience demonstrates that, when push comes to shove, legislators raise the debt ceiling in order to avoid a default. It has not mattered how cordial or fractious the relations have been between the two parties in Congress or between the legislative and executive branches. While some debt ceiling episodes have gone smoothly and others have been used to try to gain a political advantage, eventually a resolution has been reached."
Allspring's "Frequently asked questions include: "Are the debt limit and a government shutdown the same thing?" They reply, "The debt limit and a government shutdown are completely unrelated. A partial government shutdown relates to the budget process and occurs when Congress fails to appropriate funds for operating the government, while the debt limit only constrains the government's total indebtedness. It's entirely possible to have a budget dispute resulting in a government shutdown when the debt ceiling is suspended or far from binding, just as it's possible to have debt ceiling issues in a fully appropriated government with no threat of a shutdown."
Allspring queries, "What impact, if any, does a prolonged debate on raising the limit have on the money markets?" They comment, "Prior to the debt ceiling suspension era, the money markets reacted to the debt ceiling once per episode -- when the debt outstanding approached the limit, cash approached zero, and extraordinary measures approached exhaustion. Leading up to that time, the Treasury typically reduced Treasury bill (T-bill) issuance, resulting in a relative shortage of T-bills, driving their yields lower. At the same time, as the market assessed the likelihood of nonpayment on particular Treasury securities, those instruments generally sold off."
The brief continues, "The specific securities deemed at risk were generally T-bills maturing in the several weeks after the drop-dead date, as well as Treasury notes and bonds -- both those maturing in the same time period and those with interest payments due in that window. For example, if a payment late in October was considered questionable, investors might shun not only Treasury notes maturing then but also those maturing in April or October of future years, which would be due to receive interest payments that might be compromised. The rates on other money market instruments, including government-sponsored enterprise (GSE) discount notes, were generally little changed, as they would be unaffected by a payment delay on Treasury securities."
Allspring asks, "If the debt limit is not raised or suspended and all extraordinary measures have been exhausted by the Treasury, will the U.S. government default?" They answer, "If we get to the point that the Treasury has exhausted all extraordinary measures, explored any further measures, and simply run out of cash to pay the government's bills, then it is likely it would have to default. But what is meant by 'default'? The most likely answer is that it would mean a temporary delay in payments that come due -- in this case, the payment of maturities and interest on Treasury securities. This is widely termed a technical default. The bottom line is that we have no reason to expect the government will default on its obligations in the traditional sense. The worst-case scenario is that it may have to delay a payment or two for a very short period, but the payment likely will be made."
The article also questions, "What would a default look like?" They respond, "Answers to this question fall in the realm of pure speculation because we have very little concrete evidence upon which to base our opinions. Based on past experience, when push comes to shove, legislators act as quickly as possible to raise or suspend the debt ceiling to allow the government to get back to business. `For this reason, we think that, in the unlikely event the government does go into technical default (that is, delaying payment on maturing securities), it would be for a very short period, affecting at most one or two payments. Neither side of the aisle wants to be the one that caused a government default."
The Q&A says, "From a market perspective, we can only speculate. During previous crises, securities that matured shortly after the drop-dead date experienced some stress, with investors by and large shunning their purchase and risk premia causing yields on those bills to gap out. Longer bills, however, were largely unaffected, and trading in those securities continued without discernible disruption. Under a default scenario, depending on whether the securities in question remain on the Fedwire (and we think that will be the case), we could see something similar happen."
It adds, "How would a default affect the repo market? From an operational standpoint, defaulted Treasury securities, the specific issues that had suffered missed or delayed payments, would still be eligible for inclusion as collateral in repo transactions so long as they remained in Fedwire. As a practical matter, lenders might be reluctant to accept such tainted securities as collateral unless higher haircuts, or margins, were offered. In addition, it's possible that lenders also could refuse to accept Treasury securities at risk of default as collateral, even if the Treasury had not yet missed a payment on any security. Because there is no cross-default provision for Treasury securities, the vast majority of Treasury securities could continue to be used to collateralize repo transactions, at least operationally."
Finally, they ask, "If the U.S. government were to default, would money market funds be required to sell any of their defaulted securities holdings?" Allspring answers, "Not necessarily. Under SEC Rule 2a-7, a fund is not automatically required to dispose of a security that is in default. A fund may continue to hold a defaulted security if the fund's board of trustees deems it would be in the best interest of the fund's shareholders.... [A] board may find it is not in the best interests of the fund or its shareholders to sell a delayed security, especially if such a forced sale would lead to a trading loss for the fund and adversely affect the fund's net asset value."
A statement from Yie-Hsin Hung, President & CEO of State Street Investment Management, tells us, "I'm excited to share that State Street's global asset management business has been rebranded from 'State Street Global Advisors' to 'State Street Investment Management' to better reflect the breadth of solutions and services we offer to investors. Along with our new brand, we have refreshed our logo and brand identity to align closer to our parent, State Street, to create a stronger, more unified presence in the marketplace. Today is just the latest step in our evolution as a firm. In the last year, we've entered into new partnerships, expanded solutions through innovation, and entered new markets -- all to better serve you." (Note: Hung gave a keynote speech at our recent Money Fund Symposium titled, "The Future of Cash. Watch for quotes from this in our upcoming Money Fund Intelligence newsletter.)
She explains, "You will see our new branding appear in our communications and website starting today. While our brand may be evolving, our mission to create better outcomes for our clients and the world's investors won't change and how we partner with you every day won't either. Importantly, this rebrand does not involve any changes to the names, control, or ownership of our legal entities and therefore does not require any action on your part. Please feel free to visit our updated website to view our new look."
A press release explains, "State Street Global Advisors, the asset management business of State Street Corporation (STT), today announced its new brand name: State Street Investment Management. The rebranding highlights the firm's focus on growth and engagement with clients and partners, and its commitment to product innovation, in service of creating better outcomes for the world's investors and the people they serve."
It states, "In developing the new brand identity, State Street conducted research and solicited input and feedback from clients, investors and employees around the world. The update puts a stronger focus on the firm's 'One State Street' approach that aims to enhance collaboration across State Street Corporation and expand offerings for the benefit of investors globally."
Chief Marketing Officer John Brockelman comments, "State Street Investment Management is an essential partner to investors, offering them unparalleled expertise, unique insights, and both innovative and cost-effective solutions. We're excited to unveil a new brand that communicates that promise. These changes to our brand strengthen our value proposition, simplify the way we go to market, and improve our clients' experience across State Street."
In other news, Federated Hermes' Deborah Cunningham writes, "Not the time to lack 'conviction'." She tells us, "One of the numerous costs of President Trump's assault on Federal Reserve Chair Powell is casting monetary policy as black and white. It might have seemed that way decades ago. Before Chair Bernanke essentially opened it to the public, the Fed was a black box. It communicated primarily through the Federal Open Market Committee (FOMC) statement and daily trading operations rather than through speeches, press conferences and Congressional testimony. But monetary policy is as gray as it gets in economics, involving as much opinion as data."
She explains, "Trump's tirades also drown out healthy discussions about the central bank. Had he not issued a screed after the FOMC held rates steady last month, the main story might have been a growing restlessness among officials. Actually, it should be. No participant dissented from the decision, but the June Statement of Economic Projections (SEP) shifted subtly from March's, suggesting a potential divide. While the median 'dot' of the fed funds rate remained at 3.9% -- implying two quarter-point cuts this year -- seven voters indicated zero cuts compared to four in March."
Cunningham says, "Powell's response to the shift was to downplay the significance of the dot plot. 'No one holds these rate paths with a great deal of conviction ... and you can make a case for any of the rate paths that you see in the SEP.' One could ask why policymakers bother to produce the SEP if they do not have 'conviction.' Perhaps they actually don't, as there is speculation the Fed might alter the dot plot in its soon-to-be-released updated policy framework. In any case, it seems we won't see a rate cut until September."
She adds, "In the face of withering criticism, it would have behooved Powell to be resolute in his opinion that increased tariffs and intensified geopolitical conflicts could put upward pressure on inflation. After all, his stance has been to avoid the policy mistakes of the 1970s, when the Fed lowered rates too soon and inflation reaccelerated. On this point, he has the backing of most of the FOMC; members raised the Core PCE levels they expect to see in the near future."
Cunningham comments, "One member who seems close to dissenting is Governor Christopher Waller. Citing the weakening labor market, he said he would support a rate cut at July's meeting. But he was appointed by Trump and might be auditioning to succeed Powell. Speaking of that, the Wall Street Journal reported that Trump might take a path we knew was possible: naming the person he will appoint to succeed the Fed chair far earlier than is typical. The newspaper floated Waller, Fed Governor Kevin Warsh, National Economic Council director Kevin Hassett, Treasury Secretary Scott Bessent and former World Bank President David Malpass. That's a lot of names, though. By the time it is sorted out, it already might be time to announce the nominee."
Finally, she tells us, "Whatever the exact placements of the dots, cash managers will be happy for rates to decline only slightly and gradually. At the annual Crane Data Money Fund Symposium, held in late June in Boston, optimism reigned. Many of the attendees and speakers professed confidence that industry money market fund assets will remain above $7 trillion, with some expecting they will approach $8 trillion. If rates do fall by 1 percentage point by the end of 2026, as the SEP also indicated, yields should still top 3%, likely remaining attractive to investors."
Cunningham also says, "Innovation was a focus at the event. Discussions often touched on the digital future, primarily stablecoin and blockchain. The royal court's tech counselor has the ear of King Cash these days, and the sentiment in Boston was that digital liquidity products will grow in stature and number."
