Caught up in the wrangling over the US fiscal cliff is a little-publicized program that could have big implications for short-term investors and bond yields if the program expires on December 31. If the Transaction Account Guarantee (TAG) program ends, huge sums of money may start looking for a new home.
The TAG program, from the Federal Deposit Insurance Corporation (FDIC) provides an unlimited guarantee on non-interest-bearing deposits held at banks. It was started during the financial crisis to protect the financial system against bank runs, and since its inception has largely enjoyed policymaker support.
However, TAG could expire at the end of this year, which could put a lot of money into motion.
The end of the program would reset the FDIC’s guarantee limit to $250,000, affecting mostly business-transaction accounts but also deposits of family offices, high-net-worth individuals and municipalities. This could impact a sea of money: on December 31, 2010, the balance in the program totaled about $1.75 trillion. The most recent quarterly data released by the FDIS (July 2012) show this balance at roughly $2.4 trillion. Of this, $1.7 trillion is over the old guarantee limit of $250,000.
Now there is a small chance that TAG could be extended, if lawmakers reach a deal on the fiscal cliff. Sheila Bair, former FDIC head, suggested phasing in the lower guarantees. Her plan would drop the limit to $1 million as of January 2013, $500,000 as of January 2014 and finally back to $250,000 as of January 2015. This would help protect small banks, the majority of whose deposits are $1 million and under.
If TAG heads into the sunset, how much of that cash will move—and where it will go—is anyone’s guess.
But we have a few ideas.
The closest substitute would probably be a Treasury-only money-market fund. Other options might include Treasury bills, savings deposits and checking accounts at big banks. Depositors and investors may look at money-market funds and T-bills as a potential safe harbor for their short-term assets.
As we see it, TAG’s expiration could very well continue to push short-term market yields down, as investors look for the safety and liquidity of Treasury notes and bills.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.