US-dollar prime money market funds (MMFs) have increased their total exposure to European financial institutions by 16 per cent (USD27bn) in the first two months of Q3 2013, says Moody’s Investors Service.
Most of this increase is due to higher exposures to Swedish and French banks, which rose by 40 per cent and 22 per cent respectively.
Within Euro-denominated MMFs, exposure to European financial institutions remained stable, albeit with significant country shifts, while Sterling MMFs reduced their exposure to the euro area by 6.5 per cent (GBP3.2bn).
US domiciled USD funds increased assets under management (AUMs) by six per cent to USD679bn from USD639bn during the first two months of the third quarter. Credit quality has been essentially unchanged as the relative allocation between Aaa- and Aa-rated securities have remained relatively stable during that period. Approximately 20 per cent of investments in Moody’s rated MMFs remain rated Aaa.
Exposure to European financial institutions within US-Dollar Prime MMFs has risen significantly in Q3, with assets attributed to the region increasing by 16 per cent.
"US money market funds have shown a much stronger appetite for investments in Europe in recent months. This reflects the subsiding concerns about Europe’s financial system," says Yaron Ernst, managing director of Moody’s global managed investments group.
Overnight liquidity has improved slightly to 33 per cent for US-dollar prime MMFs, whereas offshore domiciled funds have seen stronger improvement, from 36 per cent to 38 per cent in the past two months.
The funds’ sensitivity to market risk has increased modestly in the first two months of the quarter, mainly due to the funds increased appetite for slightly longer-dated securities, having seen the weighted average maturity (WAM) on average extended by two days to 44 days. The average of Moody’s stressed net asset value measure of rated MMFs decreased to 0.9916 from 0.9919 at the beginning of the quarter.
Euro MMFs have seen a modest increase in AUMs by 0.9 per cent to EUR66.7bn in the first two months of the third quarter, after AUMs had reached their lowest level in 12 months in June this year.
While funds’ aggregate exposure to European financial institutions remained stable at EUR28.1bn, there have been significant shifts in country allocation opposite to those observed in Q2. Investments in French financial institutions increased by nine per cent to EUR9bn whereas exposure to Swedish banks decreased by 16 per cent to EUR5.3 bn.
The credit profiles of euro-denominated MMFs experienced a modest deterioration with a shift to Aa2- and Aa3-rated investments (+9.7 per cent) from Aaa- and Aa1-rated securities; partly due to decreased exposures to highly rated governments, agencies and repurchase agreements.
Given the flatness of the short end of the yield curve, prime funds have decreased their weighted-average maturity (WAM) by 1 day to 40.6 days on average, its lowest level in 12 months. This low WAM was also driven by the build-up of higher levels of overnight liquidity at 32.9 per cent of AUM after the large outflows that occurred at the end of Q2. Funds have reduced by 23 per cent their exposure to long-dated securities with maturities above three months and reallocated their investments in securities maturing between one and three months (+40 per cent).
The significant reduction of long-dated securities contributed to modest improvement of the funds’ sensitivity to market risk to 0.9926 on average, from 0.9923 at the beginning of the Q3 2013.
Funds’ diversification improved significantly, as their top three obligor concentration ratio hit the lowest level in the last 12 months at 18.9 per cent of their AUM. Moody’s expects this trend to continue as many European banks are returning to the short term markets after paying back close to EUR8 bn of three-year loans to the ECB at the end of September.
Prime sterling-denominated MMFs experienced an improvement in their credit profiles in the first two months of Q3 as investments in Aaa-,Aa1- and Aa2-rated securities increased by 13.6 per cent.
Exposure to European financial institutions has fallen by 6.5 per cent (GBP3.2bn) with French and Swedish financial institutions experiencing the sharpest decrease by GBP2.7bn (-21 per cent) and GBP1.2bn (-12 per cent), respectively.
Sterling prime MMFs reduced their WAM by two days to 41 days, and increased their overnight liquidity to 31.7 per cent of their AUM, from 28.3 per cent.
The increased exposures 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 0.9926 on average from 0.9920 at the beginning of the quarter.
The portfolio concentration of Sterling MMFs remained low in Q3 with exposure to the largest three obligors stabilising at 18.3 per cent of AUM on average.
Moody’s analysis is based on the portfolios of all Moody’s-rated MMFs in the first two months of Q3 2013. For the USD funds, the data covers 40 US Prime MMFs and 27 European and offshore USD-denominated MMFs. For the euro-denominated MMFs and sterling-denominated MMFs, the data covers 22 and 21 funds, respectively, domiciled in Europe.
