Fitch Ratings' latest "U.S. Money Market Funds Sector Update" says, "U.S. prime money market funds (MMFs) increasingly invest in repurchase agreements (repos) collateralized by nongovernment securities. This development is attributable to three major factors: prolonged shortage of supply of MMF-eligible securities exacerbated by increasing aversion to European exposures, the scarcity of U.S. government securities available as repo collateral, and an ultra-low interest rate environment." The report also says that European exposures are manageable. (Look for more data on money funds' August 31 portfolio holdings next week; Crane will release its latest collection on Thursday.)
Fitch writes, "European sovereign-related concerns prompted U.S. prime MMFs to rein in their exposures to French and other Eurozone banks during June, focusing on systemically important entities rated 'F1+' and limiting the weighted average maturities of their portfolios." It adds, "As discussed in the Fitch commentary, "Fitch: MMF 'Core' European Exposures No Cause for Immediate Rating Concern" dated July 8, 2011, funds were focused on large, financially sound banks with international franchises. Many of the banks found in Fitch-rated MMF portfolios are systemically important entities that are deemed to be well-positioned to manage their own exposures to peripheral Europe."
The report also says, "Weak U.S. economic data coupled with unstable conditions surrounding Greece's debt crisis created an environment where market participants view further monetary easing as possible if conditions do not improve. As of June 30, 2011, the average seven-day yield on individual U.S. prime institutional MMFs reported by iMoneyNet was 0.04%, down 3 bps from the first quarter.... While the implementation of MMF reform in 2010 has already reduced the risk profile of U.S. MMFs, the structure of the industry and the degree of systemic risk it poses continue to be debated. The timing of the further reform remains uncertain, although the MMF industry expects the final regulatory proposal to emerge sometime in the fall of 2011."
Fitch explains, "Assets under management (AUM) of Fitch-rated U.S. MMFs increased to $560.4 billion in second-quarter 2011 from $488.2 in March 2011. This 15% increase in AUM was largely due to addition of 10 MMFs managed by SSgA Fund Management (State Street), Williams Capital Management, and Milestone Capital Management. The portfolio composition of Fitch-rated U.S. MMFs remained relatively stable during the quarter, despite investor concerns over European bank exposures."
Finally, the report says, "Fitch-rated U.S. prime MMFs allocated approximately 16% of their total assets to repos, while holdings of time deposits (TD) declined <b:>`_. U.S. prime MMFs have been increasingly investing in repos backed by nongovernment assets. Fitch attributes this trend to three major factors. First, investor concerns over the continued deterioration of European sovereign credits and shortage of domestic investment opportunities led MMF managers to increase their percentage of portfolios allocated to liquidity mainly through repo investments. Secondly, the scarcity of U.S. government securities available caused greater acceptance of nongovernment repos. Finally, the ultra-low interest rate environment coupled with volatile credit spreads provide only a marginal incentive for MMFs to invest longer." Fitch shows among its "Top Five Repo Counterparties in Fitch-Rated U.S. Taxable MMFs," (as of May 2011) Barclays Bank AA–/F1+ ($16.7B), Deutsche Bank AA–/F1+ ($12.2B), BNP Paribas AA–/F1+ ($10.9B), `Bank of America ML A+/F1+, RWN ($9.5B), and Royal Bank of Scotland AA–/F1+ ($6.8B).
