In 2008 many businesses in the US became concerned that the various transaction accounts they use to conduct business could be at risk due to banks failing. This was especially true for accounts that held more than $250K, which is the maximum FDIC-guaranteed deposit. In particular companies worried about moving large amounts through banks for payrolls, lease payments, purchases of goods, etc. In order to reassure frightened corporate America, the FDIC implemented the Transaction Account Guarantee Program (TAGP), which provided unlimited government guarantees for non-interest-bearing transaction accounts such as deposits earmarked for payroll. This was all part of the Temporary Liquidity Guarantee Program (TLGP) meant to restore confidence in the shaky financial system.
Unlike the FDIC insurance on regular deposits, the government did not charge a fee for guaranteeing these TAGP accounts. And as rates went lower, many TAGP depositors left their money in these accounts that gave firms and individuals unlimited liquidity with full government backing. And earning zero on a guaranteed account vs. earning 10-20bp on an unprotected account made sense for many businesses.
At the end of 2012 however, this unlimited FDIC guarantee program is set to expire, affecting some $1.4 trillion of deposits. According to a recent survey (see attached paper from Western Asset Management), two out of five depositors in these accounts will reallocate cash elsewhere once the accounts are no longer guaranteed. The money will go into either interest bearing accounts, short term securities such as CP or short-term treasuries, or money market funds (and money market funds will be forced to buy short term securities). Given an already significant shortage of money market products out there - a problem that has been worsening since the financial crisis (see this post from 2009) - this will put downward pressure on rates (including short-term IG corporate paper). Even in a normal year demand for short-term securities increases at year-end (see discussion), but with TAGP expiration we may see more negative yields in short-term treasuries and incredibly tight CP spreads.
Pending Expiration of Unlimited Deposit Insurance Coverage
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