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Money market funds and California RANs

September 3, 2009

There’s one group of investors that aren’t likely to jump at the chance to buy California’s short-term RAN notes when they go on sale later this week: money market funds.

The notes are expected to carry a second tier rating of MIG 2, a notch below the top rating of MIG 1. That’s problematic for money market fund managers who are staring at the SEC’s proposal to limit money fund investments to short-term debt rated only the very best.

Higher Credit Quality: The proposal would limit money market funds to investing only in the highest quality securities — that is, not “Second Tier” securities. Currently, most funds are permitted to invest up to 5% of their assets in “Second Tier” securities.

5% may not seem like a lot, but when money market funds hold roughly $3.8 trillion in assets, it’s not chump change.

To be money market eligible, California would have to secure some kind of bank back stop. But given the still uncertain outlook for the state, it could be difficult to get a bank to guarantee up to $10.5 billion.  JP Morgan loaned the state $1.5 billion so it could end the IOU program early, which the state will pay back with RAN proceeds. But I’m not sure if JP Morgan or any other bank is going to want to be on the hook for $10.5 billion into next year when California’s future revenues are still so uncertain.

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