Cash is flowing into short-term U.S. government debt funds atthe fastest pace in more than six months, just when you mightexpect investors to be running for the exits.

Demand is surging even as lawmakers wrangle with a loomingdebt-ceiling deadline and investors become concerned about theTreasury missing payments on the securities held in most of thefunds. More than $75 billion was deposited in governmentmoney-market funds in the four weeks ended Aug. 16, compared withoutflows of about $18.5 billion from U.S. exchange-traded andmutual funds, Investment Company Institute data show.

Whether investors are seeking a refuge from geopolitical risksor having cold feet over the sustainability of the record rally instocks, they're benefiting from safeguards put in place in Octoberto prevent a repeat of the run on money-market funds experiencedduring the financial crisis. The changes prompted a shift of morethan $1 trillion to government funds from what are known as primefunds by more risk-tolerant investors in the run-up to thereforms.

“Investors will probably be less concerned and less weary aboutthe gyrations around the debt ceiling and what that might mean forU.S. securities,” said Deborah Cunningham, chief investment officerfor money markets at Federated Investors, which oversees $242billion in money funds.

That wasn't the case in 2013, when money-market funds saw morethan $50 billion of outflows as lawmakers pushed the debt limitsuspension closer to the date that Treasury said it expected to runout of cash.

In the latest episode, Treasury Secretary Steven Mnuchin said ina letter to congressional leaders last month that it is “critical”the debt limit is raised by Sept. 29; Treasury bill investors seethe clock running out sometime around early or mid-October.Regardless, funds like Federated and Invesco are already shunningsecurities maturing around the deadline.

As of July, taxable money-market funds, which include Treasuryfunds, held about $679 billion of short-term U.S. government debt.Of that, $111 billion matures in October, or about 11% of allTreasury holdings in the funds and 2% of all governmentmoney-market assets, according to a J.P. Morgan Securities notepublished Aug. 21.

“I'm not frightened by those numbers or scale as we have manyoptions to invest during this general timeframe that people discussas the problematic time,” said Patricia A. Larkin, chief investmentofficer of cash investment strategies at Dreyfus Corp. “The Fed'sRRP is a very welcome tool from the capacity perspective,especially in a situation like this.”

First introduced in September 2013, the Federal Reserve'sfixed-rate overnight reverse agreement wasn't yet a viablealternative for funding during earlier debt-ceiling debateepisodes, given the small number of counterparties and a daily capof $1 billion a day per entity. Now, there's a $30 billion limitfor the Fed's 136 counterparties, 102 of which are money-marketfunds.

For those risk-averse investors, remaining in money market fundsmay be the best bet since they don't have many options. Banks maybe unwilling to take on more deposits as they are near a record$11.8 trillion, according to Fed data since 1973.

“If you have about $2 trillion in government-only money fundsand 10% leaves — that's about $200 billion and that has to gosomewhere,” said Joseph Abate, a strategist at Barclays Capital.“Does it go to bank deposits? In the past it has gone into bankdeposits, at least for the institutional investors. I don't knowwhere they put it all really.”

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