At least two giant money market mutual fund shops are bracing for a flood of inflows and preparing the sandbags.

Dan Fitzpatrick and Kirsten Grind of the Wall Street Journal report that, according to unnamed sources, BlackRock [profile] and Federated [profile] are warning investors that the shops might close some money funds to new investors. It's all thanks to the impending expiration of a special Federal Deposit Insurance Corporation guarantee implemented in 2008 during the financial crisis.

The disappearing guarantee is unlimited on no-interest bank accounts and was intend "to encourage small businesses to stay with their local banks," according to the WSJ. Yet last week the Senate failed to extend the guarantee last week, meaning that it will expire on December 31 and the guarantee will revert to $250,000 per depositor per account category for about $1.7 trillion in bank deposits.

Fundsters expect that small businesses could move much of that cash, up to $250 billion according to FBR Capital Markets, into money funds, especially U.S. Treasury money funds, and depress already low yields even further. Treasury money funds currently hold about $399 billion.

"It could be a tsunami," Pete Crane, president of money fund research shop Crane Data, told the paper.

Both BlackRock and Federated insisted that their none of their money funds are closed, at least for now. BlackRock told the paper that it has "no plans to suspend subscriptions in our Treasury funds at this time."

"If conditions change, we would certainly do what we could to continue to serve our clients," a Federated spokeswoman told the WSJ.

The paper also anticipates that much of the cash in question will shift into accounts with large banks. 

Edited by: Neil Anderson, Managing Editor


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