How to protect your money | Fidelity (2024)

The US House has passed a bill to raisethe limit of how much money the government can borrow. Now, the Senate must vote to approve the deal and prevent the government from defaulting on its debt.

While the likelihood of a default or downgrade appears to have diminished significantly for now, disagreements over debt and Federal spending limits will likely continue in the future. That means you may continue to have questions about the debt ceiling and what it 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 can you tell me about the agreement reached to raise the debt ceiling?

On May 31, 2023, the House passed the bipartisan Fiscal Responsibility Act, a bill negotiated between President Biden and House Speaker Kevin McCarthy (R-Ca.) to extend the debt limit for 2 years until after the 2024 Presidential election, while also establishing new discretionary spending cuts. The Senate began debate on the bill on June 1, 2023, with Senate leadership committing to work through the weekend to bring the measure to a vote before the June 5, 2023 debt limit is reached.

What happens if the Senate fails to pass the bill?

Senate leaders from both parties are expected to push for a vote without amendments, as amendments would require the bill to be returned to the House for further votes. While both Senate Majority Leader Chuck Schumer (D-NY) and Senate Minority Leader Mitch McConnell (R-KY) have expressed optimism that a majority of Senators will vote in support of the bill, failure to do so by June 5 could result in a default on US debt payments.

What does this mean for investors holding US Treasurys?

If this deal is approved by Congress, the debt ceiling is increased, and the US does not default on its debt, this may improve the risk profile of certain US Treasury securities.

Government actions and policies, like the debt ceiling, can impact government-issued securities. This could include increased volatility in the Treasury market as the debt ceiling deadline approaches. In the worst-case scenario, there is a possibility that the US government would no longer be able to issue new debt obligations, and scheduled payments on existing obligations could be delayed.

Treasury securities are explicitly guaranteed by the full faith and credit of the US government. US Treasury securities are currently rated AAA by Moody's. S&P currently rates Treasury securities AA+. Ratings are contingent on the continued economic health of the United States. Budget deficits leading to high levels of indebtedness, and other factors impacting the US government's ability to meet its credit obligations, could affect the rating agencies’ analysis of the US government’s ability to manage its long-term debt obligations.

What does this mean for investors holding government money market funds?

If the Treasury were unable to meet a payment on a US government security, that specific security (for example, a US Treasury security maturing on a specific date) could be subject to a technical payment default. There are no “cross-default” provisions for Treasury securities—therefore, other US Treasury obligations would not be impacted, meaning US Treasurys maturing on other dates would not be in default, and other securities held in the fund would not necessarily be impacted.

Consistent with federal regulations, money market mutual funds (including the Fidelity® Government Money Market Fund, whose symbol is SPAXX; or Fidelity Government Cash Reserves, FDRXX)* invest in debt securities with short maturities and minimal credit risk. Fidelity’s money market funds seek to provide security and safety for our customers’ cash investments. We place a strong emphasis on managing money market funds with sufficient liquidity to give you access to your cash on a daily basis, no matter the market conditions.

Our portfolio managers have managed the Fidelity funds through previous debt ceiling debates and periods of significant market volatility. We are actively monitoring the ongoing debt ceiling discussions and positioning our money market funds conservatively.

Fidelity’s money market funds currently do not own any Treasury securities that mature between June 5 and the end of the month, the window in which the Treasury has stated that it is likely to exhaust measures to pay its obligations. Fidelity’s money market funds also carry liquidity levels significantly higher than their regulatory requirements.

For more detailed fund information, you can view the research page and prospectus link for any fund by entering the symbol in the "Search or get a quote" box on Fidelity.com (or SPAXX by visiting this link). The “Composition” tab shows how the fund has allocated its portfolio across different types of securities as well as the fund’s liquidity levels, and by following the prospectus link you can see the specific individual securities held in its portfolio.

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.

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 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 would Fidelity’s fund management operations be affected if the US were to default or miss a payment on its debt?

Fidelity maintains and regularly enhances detailed contingency plans for settlement, collateral management, and payment processing. These plans would incorporate standard industry practices that address any delay in US Treasury debt payments.

How are Fidelity’s bond funds preparing for the approaching debt ceiling?

We continuously evaluate market conditions and position our bond funds accordingly. Fidelity has extensive experience in managing through volatility and Fidelity’s taxable and municipal bond portfolios are positioned appropriately, to source liquidity as needed to meet redemptions and/or to reposition opportunistically to take advantage of shifting security valuations.

How are Fidelity money market funds positioned to withstand ongoing market volatility and debt ceiling risks?

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, considering debt ceiling risks. Our funds invest in money market securities of high quality and 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 is a repurchase agreement (repo)? 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. (Non-traditional repos involve a wider range of collateral.)

Fidelity’s money market funds only invest in repurchase agreements with the highest- quality financial institutions, ones that we would approve on an unsecured basis. The underlying collateral is repriced every day and must meet contractual requirements that determine the type of securities and additional margin needed.

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 (repos) collateralized by US Government securities. All 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 repo 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 (Fed) is a prominent counterparty.

Are Fidelity’s US Treasury and government money market funds subject to liquidity-triggered redemption restrictions (“gates or fees”)?

No. Fidelity's government and US Treasury money market funds do not employ liquidity gates or fees for redemptions. While SEC reforms made 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.

Safety and liquidity have always been, and will continue to be, our top priority objectives in managing money market funds.

Would Fidelity’s money market mutual funds be able to hold US Treasury debt if the long-term or short-term government credit ratings were downgraded?

Even if one or more rating agencies were to downgrade the long-term or short-term ratings on the US government, money market funds would not be required to sell any government securities.

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, then the fund would need to sell those defaulted securities, unless the fund’s board of trustees determines that disposing of the securities would not be in the best interests of the fund. The board may consider market conditions, among other factors, in making that decision.

How short is “short term” for 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,³which 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.

Fighting fear

To help manage the anxiety and fear that may arise from watching events such as the debt ceiling debate, 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.