Some major bond fund managers are asking their institutional clients to consider waiving strict requirements that might force mass selling of Treasury bonds if the United States loses its AAA rating.
Pension funds, endowments and other large investors typically establish rules governing how their assets can be invested when they sign on with a money manager. Some analysts fear a downgrade of the U.S. rating would spark a mass sell-off because of guidelines that only permit investments in AAA-rated securities.
Conservative investors would be poorly served if fund managers had to sell off Treasury securities because of a downgrade, said John Donaldson, director of fixed income at Haverford Investments in Radnor, Pennsylvania.
"In that situation, you'd want the safety of the instruments most likely to pay off," he said "It's hard to say a flight to quality should include something else."
BlackRock, the largest money manager in the world, held calls with clients last week to review possible scenarios if the U.S. is downgraded.
On the calls, which were led by Senior Managing Director Peter Fisher and Vice Chairman Barbara Novick, clients were asked to consider if limitations on holding debt rated less than AAA should be revised and whether strict sell-down requirements were appropriate.
"We've been working with clients steadily to make sure they are thinking about this and preparing for it," spokeswoman Bobbie Collins said.
New York-based BlackRock oversees almost $3.7 trillion, including $612 billion in actively managed institutional fixed income accounts and $438 billion in indexed institutional fixed income accounts.
T Rowe Price Group Inc in Baltimore has spoken with several institutional investors in recent days regarding whether guidelines on separately managed accounts should be revised, given the possibility of a U.S. debt downgrade.
"We are looking into whether or not a restatement of the guidelines may be required, and what this may involve," spokeswoman Heather McDonold said. The firm manages $520.9 billion, including $132.3 billion in fixed income.
The institutional asset management unit of Wells Fargo has also been talking with some of its clients about changing investment rules and possibly signing waivers to avoid forced selling of Treasuries in case of a downgrade.
The issue has only come up with a "handful of accounts," a spokeswoman said. "We would like to get contingency plans in place," she said. "That may or may not include signing of waivers."
The San Francisco-based bank's Wells Capital Management unit manages $355 billion, including $111 billion in institutional separate accounts.
The fixed-income managers at JPMorgan Chase & Co have also been reaching out to clients to ensure that they aware of the implications of ratings changes on investments.
"We have been actively reviewing guidelines and contacting clients to discuss potential portfolio considerations where necessary," spokeswoman Kristen Chambers said.
The New York-based bank manages $1.3 trillion, including $708 billion for institutional investors.
The three major bond agencies have said they will lower debt ratings of federal agencies and state and local government bonds if the United States loses its top-notch rating.
Standard & Poor's has warned that it may strip the U.S. AAA-rating even if the White House and Congress reach a deal to raise the $14.3 trillion debt ceiling without a credible plan to reduce its deficit.
The Treasury Department has reiterated this week that the federal government will run out of funding options on August 2 if the debt ceiling is not raised.