US domiciled money market funds' (MMFs) assets under management (AUM) increased 4.3 per cent to USD667bn in Q3, despite political uncertainty over the US debt ceiling, says Moody's Investors Service in a new report.
Euro MMFs saw a modest 1.2 per cent increase in AUM after reaching their lowest level in 12 months in June, while Sterling MMFs experienced a 1.9 per cent drop in AUM.
Euro MMFs' exposure to European financial institutions remained stable, albeit with significant shifts in country allocation. US MMFs boosted their exposure to Swedish and French banks by 27 per cent and 16 per cent respectively, while investment in Swiss and Norwegian financial institutions dropped by 27 per cent. Sterling MMFs decreased their exposure to European financial institutions, but boosted their investment in Singapore-based banks by almost 69 per cent.
After rising uncertainty in Q3 2013, major disruption in the MMF sector was avoided following the agreement reached on the US debt ceiling limit on October 16. The increase in cash in response to the debt ceiling impasse partly explains the material improvement of overnight liquidity in Q3, which, for US domiciled funds, increased to 36 per cent on average (end-June: 33 per cent).
Despite the prolonged period of low interest rates and uncertainty from the US debt ceiling impasse, US domiciled MMFs AUM increased 4.3 per cent to USD667bn at the end of September (end-June: USD640bn). In European and offshore domiciled funds, combined AUM declined 1 per cent to USD229bn at the end of September (end-June: USD233bn).
In US domiciled funds, aggregate exposure to European financial institutions stood at approximately 28 per cent of total investments or USD186bn at the end of September, USD176bn up from the end of June when the accounted for 27 per cent of total assets. The composition of exposure to European institutions changed with increases to Swedish financial institutions (USD47bn from USD37bn) and French banks (USD50bn from USD43bn), while exposure to Swiss and Norwegian banks decreased (USD24bn from USD33bn). Exposure to Australian financial institutions declined 11 per cent to USD36bn from USD40bn in Q3 and down 21 per cent year to date from USD46bn. Japanese financial institutions increased eight per cent to USD78bn from USD71bn during the third quarter and exposure to US financial institutions decreased five per cent to USD31bn from USD33bn in the same period.
Funds' credit profiles improved in Q3. Investments rated Aa3 and higher increased by 2.3 per cent in US domiciled funds and 6.8 per cent in European and offshore domiciled funds. However, MMFs sensitivity to market risk slightly increased in Q3 due to the modest increase in longer dated securities, partially offsetting the improvement in the credit profiles.
Euro MMFs have seen a modest increase in AUM by 1.2 per cent to EUR66.9bn after reaching their lowest level in 12 months in June.
While funds' aggregate exposure to European financial institutions remained stable at EUR28.1bn, significant shifts in country allocation were observed in Q3. These shifts have been prompted by long-term refinancing operation repayments (LTRO). Investments in French financial institutions increased by 14 per cent to EUR9.4bn whereas exposure to Swedish banks decreased by 20 per cent to EUR5bn.
Prime euro-denominated funds' market-risk profiles improved in Q3. Funds reduced their maturity profiles and increased their liquidity levels in response to market uncertainty. However, funds' credit profiles experienced a modest negative shift in rating distribution in Q3, partly due to increased exposures to asset-backed commercial paper. Whilst exposure to Aaa and Aa1-rated securities decreased by 7.5 per cent, investments in Aa2 and Aa3-rated securities increased by 9.3 per cent.
Euro prime funds have decreased their weighted-average maturity (WAM) to the lowest level in 12 months at 39.2 days from 41.6 days on average. The relatively small changes in the credit profiles coupled with the significant WAM decrease prompted an improvement of the funds' sensitivity to market risk. Funds' stressed net asset value at the end of Q3 was 0.9929 from 0.9923 at the beginning of the quarter.
Sterling MMFs have seen a decrease in combined AUM by 1.9 per cent to GBP99.9bn during Q3.
Exposure to European financial institutions decreased, both in absolute terms (-GBP3.8bn to GBP47.9bn) and relative terms, at 48 per cent of combined funds' AUM from 50.9 per cent at the beginning of the quarter. Exposure to Dutch and French financial institutions experienced the sharpest decrease by GBP1.5bn (-18.3 per cent) and GBP1.1bn (-8.6 per cent), respectively. On the other hand, investments in relatively highly rated Singapore-based banks increased significantly by GBP2.2bn to GBP5.4bn.
Funds' credit, market-risk and maturity profiles improved in Q3, as funds' reduced their maturity profiles and increased their liquidity levels. Credit profiles improved as investments in Aa-rated securities increased by 8.9 per cent at the expense of exposures to A-rated instruments (-6.7 per cent). After reaching a peak in June, WAM reduced to 42.3 days, on average. The increased exposure to highly rated instruments, combined with a shorter duration, led to an improvement in the funds' sensitivity to market risk. Stressed net asset value increased to 0.9925 on average from 0.9920 at the beginning of the quarter.