Credit profiles remain stable, but maturities lengthen in euro and sterling funds
Paris, November 26, 2014 —
In the third quarter of 2014,
US and euro money market funds (MMFs) increased their exposures to European financial institutions in Q3 2014, according to the latest quarterly MMF reports from Moody's Investors Service.
Maturities in euro and sterling funds increased, owing to the low rates in Europe and ongoing attempts by funds to compensate for dwindling yields.
In third-quarter 2014, assets under management in US-domiciled prime MMFs grew 1.6% to USD637 billion, following a 4% decline in the second quarter. In European and offshore USD-denominated funds, assets under management declined 0.2% to USD242 billion. In addition, lending to the Fed's overnight reverse-repo facility rose to 20% of total investments. The increase came after a drop to 15% at end-August from 21% at end-June. At the same time, the aggregate exposure to European financial institutions rose to USD146 billion, or 23% of total investments, from USD140 billion, or 22%. The exposure to French financial institutions rose to USD40 billion from USD37 billion, and in the UK, to USD21 billion from USD15 billion. In the Americas, the exposures to Canadian financial institutions were up 2 percentage points, and up 1 percentage point to US financial institutions.
"Aggregate assets under management are still down overall from last year, owing to investors' caution, in light of looming money market fund reforms," says Ram Sri-Saravanapavaan, a Moody's Associate Analyst. Credit quality deteriorated marginally, with the proportion of investments rated Aa3 or higher at 68%, down from 70%, and at 67% for the European and offshore-domiciled funds, also down from 70%.
USD funds maintained relatively short maturities of 39 days, as well as solid overnight liquidity levels of 30%.
"The euro-denominated MMFs' assets under management rose to their highest level in 12 months," says Vanessa Robert, a Moody's Vice President. The 19.2% increase to EUR 85.6 billion, which followed a 15.6% increase in the second quarter, was likely driven by the ECB's September rate cut, as some investors moved their cash from government money funds and from bank deposits to prime funds, in an effort to avoid negative yield on their investments.
Credit quality improved slightly, with the proportion of investments rated Aa3 or higher rising to 68%, from 66%. Exposures to the top five European financial institutions increased, as did the aggregate exposure to European financial institutions.
Maturities lengthened to 46 days on average, another 12-month high, from 44 days, also in anticipation of the ECB's interest rate cut in September. Overnight liquidity grew to 28.7% from 27%.
Assets under management in sterling-denominated MMFs rose slightly, 2.6%, to GBP102.3 billion. Exposures to European financial institutions hit a 12-month low, declining to GBP39.9 billion from GBP42.9 billion (or 39% of total investments from 43%), due to decline in investments in French banks to 7.8% from 10.6%.
Overnight liquidity declined to 24.7%, a 12-month low, from 28.1%, while the exposure to securities with maturities longer than one month rose to 59% from 56%. The weighted average maturity of sterling-denominated prime funds increased by 3.2 days to 47.7 days, on average.
Credit quality improved slightly, with the proportion of securities rated Aa3 or higher rising to 67% from 64% , and also up from the past-12-month average of 63%.
"The longer maturities were offset by the improvement in credit quality, resulting in a neutral impact on portfolios' market risk, which was relatively stable," says Robert.
Moody's analysis is based on the portfolios of all Moody's-rated MMFs in the third quarter of 2014. For USD funds, the data covers 37 US Prime MMFs and 26 European and offshore US dollar-denominated MMFs. For euro-denominated MMFs, the data covers 19 funds, and for sterling-denominated MMFs, 21 funds, all domiciled in Europe.
