Prime euro-denominated money market funds (MMFs) suffered a near 12 per cent drop in assets under management (AUM) to EUR66.1bn, as investors keep searching for higher yields, according to Moody’s.
US prime and offshore USD MMFs also recorded a decline in AUM of 3.2 per cent to USD640bn and two per cent to USD237bn, respectively, whereas sterling denominated MMFs saw an increase in AUM by 3.2 per cent to GBP118.5bn during the last quarter.
The majority of MMFs continued to increase their exposure to European banks in Q2, reflecting subsiding concerns about Europe’s financial system. Sterling-denominated and offshore USD MMFs increased their exposure to European financial institutions by GBP4.2bn to 53.1 per cent of total investments (GBP62.4bn), and USD5bn to 35 per cent of total investments (USD91bn), respectively.
Moody’s analysis is based on the portfolios of all Moody’s-rated MMFs in Q2 2013. For the US dollar funds, the data covers 41 US prime MMFs and 29 European and offshore US dollar-denominated MMFs. For the euro-denominated and sterling-denominated MMFs, the data covers 22 funds domiciled in Europe for each (i.e., 44 in total).
Overall, the credit profiles of euro-denominated funds stabilised, while the profiles of US prime and sterling MMFs continued to experience some deterioration during Q2 2013. Portfolios’ duration and diversification improved for euro- and sterling-denominated funds.
Given the low interest-rate environment and low yields across the sector, Euro-denominated MMFs experienced significant outflows, and the combined AUM decreased by 11.6 per cent to EUR66.1bn during Q2.
The funds’ aggregate exposure to European financial institutions decreased by five per cent to EUR28.2bn at the end of June, from EUR29.7bn at the beginning of the quarter. However, due to the AUM decrease, exposure increased in relative terms to 43 per cent of AUM from 40 per cent over the period. Exposure to French financial institutions recorded a sustained decline — dropping by 23 per cent (EUR2.5bn) to EUR8.3 bn. At the same time, investments in highly rated Swedish banks increased by 12 per cent to EUR6.3bn.
Overall, the credit profiles of euro-denominated MMFs stabilised, with "barbell" strategy allocations, reflected by the 25 per cent decrease in exposure to Aa1-rated securities, which was driven by reduced investments in repurchase agreements, and an increase in investments rated Aaa (+14 per cent), Aa3 (+10 per cent) and A1 (+22 per cent).
Given the flatness of the short end of the yield curve, prime funds have decreased their weighted-average maturity (WAM) by 2.4 days to the lowest level in 2013 at 41.2 days from 43.69 days on average. The decrease in the WAM was driven by higher exposure to securities maturing within one month (+ nine per cent) at the expense of relatively longer-dated securities with maturities ranging between one and three months (-15 per cent).
The neutral changes in the credit profiles coupled with the WAM decrease contributed to the stabilisation of the funds’ sensitivity to market risk. Funds’ stressed net asset value at the end of Q2 was 0.9922 on average, virtually unchanged from the beginning of the quarter.
Both US prime MMFs and offshore USD MMFs have shown increased exposures to European financial institutions, rising by USD2bn to around 27 per cent of total investments (USD174bn) and by USD5bn to 35 per cent of total investments (USD91bn), respectively.
US prime funds increased exposure to French banks (USD43bn from USD37bn), and reduced exposure to Swedish banks (USD37bn from USD46bn) due to continuing tightening by the Swedish central bank.
The credit profiles of USD denominated MMFs experienced a modest deterioration in Q2 2013 due to fund managers’ continued search for higher yields and limited asset supply. Investments rated Aa3 and higher dropped by 4.3 per cent in US domiciled funds and 6.3 per cent in European and offshore domiciled funds. Securities rated Aaa moved down to approximately 19 per cent and 16 per cent of MMF investments, from roughly 23 per cent and 20 per cent in March for US domiciled and offshore domiciled funds, respectively.
MMFs sensitivity to market risk increased modestly in this quarter due to the increased exposure to slightly longer dated securities combined with the modest deterioration in the credit profile. For US domiciled funds, stressed net asset value (NAV) declined to an average 0.9917 at the end of June from 0.9923 at the end of March. For European and offshore funds, stressed NAV declined to an average of 0.9918 at the end of June from 0.9926 at the end of March.
At quarter-end, overnight liquidity remained at elevated levels in US domiciled funds, reaching 33 per cent, down from prior quarter levels of approximately 39 per cent. European and offshore funds have remained in a tighter range at around 35 per cent. Treasury and repurchase agreements backed by Treasury securities continue to be a large source of liquidity for US domiciled funds at 24 per cent of total investments at the end of Q2 2013.
Exposure of prime sterling-denominated funds to European financial institutions increased, both in absolute terms (+GBP4.2bn at GBP62.4bn) and relative terms at 53.1 per cent of combined funds’ AUM from 50.6 per cent at the beginning of the quarter. The bulk of this increase is driven by higher investments in Swiss banks (+GBP1.8bn), Swedish banks (+GBP1.7bn) and French banks (+GBP1.2bn).
Credit profiles experienced a negative shift in Q2. Whilst exposure to A-rated securities increased to 46 per cent of funds’ assets from 39 per cent, investments in Aaa- and Aa-rated securities decreased to nine per cent from 13 per cent and to 45 per cent from 48 per cent, respectively.
Due to the low-yield environment, especially at the short end of the curve, prime funds have increased their WAM by 1.5 days to 42 days — the highest level over one year. The increase in WAM was driven by fund managers’ search for higher yield. After the peak reached in April of average overnight liquidity above one-third of funds’ AUM, the liquidity level trended down to 28.3 per cent of AUM, in line with that of the previous quarter-end.
Given the increased exposure to relatively long-dated securities, combined with the deterioration in funds’ credit profiles, MMFs’ sensitivity to market risk increased. Their stressed net asset value deteriorated to 0.9919 on average at the end of Q2 from 0.9921 at the beginning of the quarter.
Funds’ diversification improved, as their top three obligor concentration ratio dropped to 17.9 per cent of AUM, the lowest level in 12 months.
