Prime euro-denominated money market funds (MMFs) suffered a near 12% drop in assets under management (AUM) to EUR66.1 billion, as investors keep searching for higher yields, according to rating agency Moody’s.
US Prime and offshore USD MMFs also recorded a decline in AUM of 3.2% to USD640 billion and 2% to USD237 billion, respectively, whereas sterling denominated MMFs saw an increase in AUM by 3.2% to GBP118.5 billion during the last quarter.
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The majority of MMFs continued to increase their exposure to European banks in Q2, reflecting subsiding concerns about Europe’s financial system. Sterling-denominated and offshore USD MMFs increased their exposure to European financial institutions by GBP4.2 billion to 53.1% of total investments (GBP62.4 billion), and USD5 billion to 35% of total investments (USD91 billion), respectively.
Moody’s analysis is based on the portfolios of all Moody’s-rated MMFs in Q2 2013. For the US dollar funds, the data covers 41 US Prime MMFs and 29 European and offshore US dollar-denominated MMFs. For the euro-denominated and sterling-denominated MMFs, the data covers 22 funds domiciled in Europe for each (i.e., 44 in total).
Overall, the credit profiles of euro-denominated funds stabilised, while the profiles of US prime and sterling MMFs continued to experience some deterioration during Q2 2013. Portfolios’ duration and diversification improved for euro- and sterling-denominated funds.
— Euro-denominated MMFs: AUM drop nearly 12%; Exposure to French financial institutions falls by 23%, while investments in Swedish banks increase by 12%; Credit profiles stabilise
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By GlobalDataGiven the low interest-rate environment and low yields across the sector, Euro-denominated MMFs experienced significant outflows, and the combined AUM decreased by 11.6% to 66.1 billion during Q2.
The funds’ aggregate exposure to European financial institutions decreased by 5% to 28.2 billion at the end of June, from 29.7 billion at the beginning of the quarter. However, due to the AUM decrease, exposure increased in relative terms to 43% of AUM from 40% over the period. Exposure to French financial institutions recorded a sustained decline — dropping by 23% (EUR2.5 billion) to EUR8.3 billion. At the same time, investments in highly rated Swedish banks increased by 12% to EUR6.3 billion.
Overall, the credit profiles of euro-denominated MMFs stabilised, with "barbell" strategy allocations, reflected by the 25% decrease in exposure to Aa1-rated securities, which was driven by reduced investments in repurchase agreements, and an increase in investments rated Aaa (+14%), Aa3 (+10%) and A1 (+22%).
Given the flatness of the short end of the yield curve, prime funds have decreased their weighted-average maturity (WAM) by 2.4 days to the lowest level in 2013 at 41.2 days from 43.69 days on average. The decrease in the WAM was driven by higher exposure to securities maturing within one month (+9%) at the expense of relatively longer-dated securities with maturities ranging between one and three months (-15%).
The neutral changes in the credit profiles coupled with the WAM decrease contributed to the stabilisation of the funds’ sensitivity to market risk. Funds’ stressed net asset value at the end of Q2 was 0.9922 on average, virtually unchanged from the beginning of the quarter.
— US-dollar Prime MMFs: Exposure to European securities increases; modest credit deterioration; Overnight liquidity remains high
Both US Prime MMFs and offshore USD MMFs have shown increased exposures to European financial institutions, rising by $2 billion to around 27% of total investments ($174 billion) and by $5 billion to 35% of total investments ($91), respectively.
US Prime Funds increased exposure to French banks ($43 billion from $37 billion), and reduced exposure to Swedish banks ($37 billion from $46 billion) due to continuing tightening by the Swedish central bank.
The credit profiles of USD denominated MMFs experienced a modest deterioration in Q2 2013 due to fund managers’ continued search for higher yields and limited asset supply. Investments rated Aa3 and higher dropped by 4.3% in US domiciled funds and 6.3% in European and offshore domiciled funds. Securities rated Aaa moved down to approximately 19% and 16% of MMF investments, from roughly 23% and 20% in March for US domiciled and offshore domiciled funds, respectively.
MMFs sensitivity to market risk increased modestly in this quarter due to the increased exposure to slightly longer dated securities combined with the modest deterioration in the credit profile. For US domiciled funds, stressed net asset value (NAV) declined to an average 0.9917 at the end of June from 0.9923 at the end of March. For European and offshore funds, stressed NAV declined to an average of 0.9918 at the end of June from 0.9926 at the end of March.
At quarter-end, overnight liquidity remained at elevated levels in US domiciled funds, reaching 33%, down from prior quarter levels of approximately 39%. European and offshore funds have remained in a tighter range at around 35%. Treasury and repurchase agreements backed by Treasury securities continue to be a large source of liquidity for US domiciled funds at 24% of total investments at the end of Q2 2013.
— Sterling-denominated MMFs: Exposure to Swiss, Swedish and French banks increases; Credit, market risk and maturity profiles deteriorated
Exposure of prime sterling-denominated funds to European financial institutions increased, both in absolute terms (+GBP4.2 billion at GBP62.4 billion) and relative terms at 53.1% of combined funds’ AUM from 50.6% at the beginning of the quarter. The bulk of this increase is driven by higher investments in Swiss banks (+GBP1.8 billion), Swedish banks (+GBP1.7 billion) and French banks (+GBP1.2 billion).
Credit profiles experienced a negative shift in Q2. Whilst exposure to A-rated securities increased to 46% of funds’ assets from 39%, investments in Aaa- and Aa-rated securities decreased to 9% from 13% and to 45% from 48%, respectively.
Due to the low-yield environment, especially at the short end of the curve, prime funds have increased their WAM by 1.5 days to 42 days — the highest level over one year. The increase in WAM was driven by fund managers’ search for higher yield. After the peak reached in April of average overnight liquidity above one-third of funds’ AUM, the liquidity level trended down to 28.3% of AUM, in line with that of the previous quarter-end.
Given the increased exposure to relatively long-dated securities, combined with the deterioration in funds’ credit profiles, MMFs’ sensitivity to market risk increased. Their stressed net asset value deteriorated to 0.9919 on average at the end of Q2 from 0.9921 at the beginning of the quarter.
Funds’ diversification improved, as their top three obligor concentration ratio dropped to 17.9% of AUM, the lowest level in 12 months.
