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Euro prime money fund balances soar in 2014 as investors flee negative yields, says Moody’s

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Euro prime money market fund (MMF) balances grew by 33.6% in 2014 to EUR82 billion, according to Moody’s Investors Service’s newest quarterly money market fund reports. 

"This increase in assets is directly attributable to the European Central Bank's rate cut that led investors to reallocate their cash to prime funds from government-only funds and bank deposits, in order to avoid negative yields," says Vanessa Robert, a Moody's Vice President.

However, the credit profiles of euro prime funds deteriorated as investments in Aa3 or higher-rated securities decreased to 60% of portfolios in Q4 from 66% in Q3, owing largely to reduced investments in highly rated government securities and repurchase agreements.

Additionally, the funds' reduced weighted average maturity (WAM) decreased their sensitivity to market risk, with the stressed net asset value (NAV) rising to 0.9919 on average at the end of Q4 from 0.9909 at the end of Q3.

Following six consecutive months of positive net flows into US funds, US-based MMFs' assets under management increased by 9% from June 2014 to USD682 billion at year-end 2014. Balances for the year, however, were flat. In European and offshore US-dollar funds, total managed assets reached their lowest level for the year at USD227 billion.

The credit profiles of US prime MMFs improved, with investments rated Aaa increasing to 24% at the end of the quarter from 13% in November 2014. The improved credit profiles reduced the sensitivity of US-domiciled MMFs to market risk, with the funds' average stress NAV rising to 0.9925 in Q4 2014 from 0.9920 in Q3 2014.

Furthermore, US MMF's aggregate exposure to European financial institutions fell to 23% (or USD156 billion) at year-end from 33% at the start of Q4. "Exposure to European banking systems dropped across the board in the final quarter of 2014, with Spain being the only exception. US money market funds continued to allocate the largest amount of investment to French financial institutions, but in December we saw a 31% drop in allocation," says Robert Callagy, a Moody's Vice President.

"Funds' exposure to repurchase agreements increased at the end of the fourth quarter compared with the third, showing that managers are actively making use of the Fed's overnight and term reverse repo facilities," adds Ram Sri-Saravanapavaan, a Moody's Associate Analyst.

Sterling prime money fund balances hit the highest level of the year at GBP110.7 billion, registering an overall growth of 10.3% in 2014.

The credit profiles of sterling MMFs improved, as investments in Aa3 or higher-rated securities improved to 67% in Q4 from 64% in Q3, driven by increased investments in highly rated government securities and repurchase agreements. Exposure to European financial institutions fell to its lowest relative level of 2014, at 36.7%, owing mainly to reduced investments in Dutch banks.

"Shortened WAM, combined with improved credit quality, increased the funds' resilience to market risk, with the stressed NAV reaching the highest level of the year," adds Robert.

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