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Money market funds increase WAM and market risk, says Moody’s

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US-dollar, euro and sterling prime money market funds (MMFs) have increased their sensitivity to interest rates in the first two months of 2014, meaning their stressed net asset values have deteriorated, according to Moody’s.

In US domiciled funds, aggregate exposure to European financial institutions rose to approximately 31 per cent of total investments at the end of February from 25 per cent at year-end 2013.
Some of this increase came while reducing exposures to Australian and Japanese financial institutions, whose share of invested assets declined to 16.5 per cent from 18 per cent.
Partially due to the higher exposure to European banks, the credit quality of US prime MMFs saw some deterioration.
After the expected year-end low weighted average maturity (WAM) driven by high levels of liquidity, prime funds increased their WAM by three days to 42 days and reduced their liquidity levels.
These changes in maturity and credit exposure increased MMFs' sensitivity to market risk, reducing the average stressed NAV by 4 bps to 0.9915.
With the prolonged period of low interest rates and continuing uncertainty around regulation, US domiciled prime MMFs' AUM (of Moody's-rated funds) declined 1.2 per cent to USD678bn at the end of February from USD686bn at year-end. In European and offshore domiciled funds, combined AUM increased nine per cent to USD238bn.
Unlike US-dollar funds, Euro-denominated MMFs' aggregate exposure to European financial institutions dropped to 35 per cent of total invested assets as of the end of February, from 38 per cent at year end. Changes in investments in Swedish, Dutch and French financial institutions were the largest contributors to the decline. Credit profiles improved as investments in Aaa- and Aa-rated investments increased by 3.5 per cent, partly because of higher exposures to repurchase agreements collateralized by highly rated sovereign securities.
Alongside other money market funds, following the year-end low in WAM, prime funds have increased their average WAM by 10.5 days to 41.3 days. Exposure to securities with maturities above three months rose to 23 per cent at the end of February from 15 per cent in Q4. This reflects managers' continued struggle to generate yield, amid the ongoing unfavorable interest rate environment. The average liquidity of these funds declined to 29 per cent from 32 per cent in Q4.
The increase in WAM prompted a deterioration in the funds' average stressed NAV, which declined 13bps to 0.9923.
Euro-denominated MMFs recorded a modest (1.9 per cent) increase in AUM to EUR63.7bn in the first two months of the first quarter.
Exposure to European financial institutions remained roughly unchanged at 44 per cent of total investments, but well below the 12-month average of 47 per cent.
After the usual difficulty in finding counterparties at year-end, the average top three obligor concentration ratio dropped to 18.7 per cent from 22.1 per cent.
While overnight liquidity remained above 30 per cent of fund portfolios (at 30.9 per cent), exposures to securities with maturities above 3 months rose to 24.1 per cent from 19.7 per cent in Q4. As a consequence, WAM of sterling-denominated prime funds increased by 4.3 days to 45.1 days, on average. This prompted a rise of the funds' sensitivity to market risk. Funds' stressed NAV declined to 0.9913 on average at the end of February from 0.9924 at the end of 2013.
Moody's analysis is based on the portfolios of all Moody's-rated MMFs in the first two months of Q1 2014. For the US dollar funds, the data covers 40 US Prime MMFs and 27 European and offshore US dollar-denominated MMFs. For the euro-denominated MMFs and sterling-denominated MMFs, the data covers 22 funds in each sub-segment, domiciled in Europe.

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