Late last week, both Deutsche Bank's William Prophet and J.P. Morgan Securities' Alex Roever released comments on the portfolio holdings of the largest money market funds, and both updates showed a continued return to French and Eurozone holdings. Deutsche Bank's William Prophet wrote Thursday in a piece entitled, "Do You See What I See?," "[B]y virtually all measures, money fund lending standards continued to ease during February. Last month we highlighted the fact that lending to French banks had bounced back to a non-zero amount. And we're now happy to report that this trend continued into February."
Prophet explains, "The numbers are still rather small of course (and the maturities rather short) but this is all part of the healing process. We show a regional breakdown of the European bank CD portfolio of large U.S. money funds ... among our sample anyway the numbers for French banks nearly doubled between Jan and Feb. To be fair, growth in the total amount of the European bank CD's on U.S. money fund balance sheets was virtually flat on the month—and it's been flat for about five months now."
He continues, "But other forms of lending -- and risk metrics in general -- continue to go up. For example, we show the amount of repo's on money fund balance sheets where the counterparty is a European bank. These have been rising for quite some time now and the trend continued during February (although just barely)."
Finally, Prophet adds, "More importantly however, there has been a significant increase in the amount of term unsecured lending to European banks. In other words, even though the numbers ... aren't going up just yet, the subset of 3- to 6-mo loans has increased dramatically over the past two months.... Note that we are showing this data over rolling two month horizons because this process really started back in January. But what we show in this chart is the amount of monthly newly-originated 3- to 6-mo loans to European banks; notice the recent acceleration."
J.P. Morgan Securities released an "Update on prime money fund holdings for February 2012 on Friday. The latest Portfolio Holdings analysis says, "With improving tone in the short-term credit markets in February, prime MMFs increased total Eurozone bank exposures for the second consecutive month by $30bn after increasing exposures by $27bn in January. Unlike January when increased Eurozone bank exposures were driven by more investments in secured products (ABCP and repo), February's increases were driven primarily by investments in unsecured products (CP, CD, time deposits, and other notes), reflecting improving tone."
They write, "Globally, total bank exposures increased (+$17bn), driven by increases in repo (+$17bn), time deposits and other notes (+$19bn). Unsecured CP/CD and ABCP holdings declined by $14bn and $6bn, respectively (Exhibit 2). Total non-Eurozone European bank exposures declined (-$31bn), driven by declines in unsecured CP/CD (-$38bn), ABCP (-$3bn), and time deposits and other notes (-$3bn). Some of these declines were offset by increases in repo (+$14bn). Non-European bank exposures resumed their rise in February (+$18bn) after seeing a slight decline in January (-$3bn). Since May 2011, non-European bank exposures have increased by $107bn, mostly in the form of unsecured CP/CD (+$82bn)."
JPM continues, "Prime MMF AUM increased by $30bn in February, driven entirely by institutional funds. From the end of 2011 to the end of February 2012, institutional prime MMF AUM increased by $42bn while retail prime MMF AUM declined by $11bn according to iMoneyNet. February data indicate that investors felt more comfortable with French bank credit as prime MMFs placed more cash with unsecured French bank credit (+$11bn) than in January (+$8bn). But the fact that most of this increase was in overnight time deposits indicate that investors remained cautious about French banks. Furthermore, the French bank buying is still concentrated mostly in a few large funds in our sample."
They add, "Notably, holdings of Swiss and Swedish bank unsecured CP/CD declined by $10bn and $19bn, respectively in February. We believe this is attributed to a combination of improving sentiment regarding the Eurozone, the recent Moody's rating's review of banks, and rich levels as cash fled to these European "safe haven" banks during last year's European peripheral debt crisis. We are now seeing rotation out of these banks into banks in France and Germany for yield and into banks in the Netherlands, Japan, and the US due to potential downgrades of banks by Moody's."
The Update also says, "According to our estimates, the top 5 banks whose unsecured CP/CD holdings were cut by prime MMFs in February were Credit Suisse, UBS, RBS, Nordea, and Svenska.... The top 5 banks whose unsecured CP/CD holdings by prime MMF rose in February were J.P. Morgan, ING, Deutsche Bank, BNS, and Mizuho. All of these banks had their short term ratings of P-1 affirmed by Moody's or were not put on review by Moody's.... Also notable is a decline of $10bn in repo exposures to US banks."
Finally, the piece tells us, "Liquidity continues to be the priority for prime MMFs. Funds maintained short tenors for their bank holdings. Although French bank exposures have increased, more than 90% of these holdings remain under 1-week in final maturity.... We think the larger prime MMFs will maintain or modestly increase core Eurozone bank exposures in the coming weeks. Smaller funds may not have the will to engage in Eurozone credits as they are likely more sensitive to investor sentiment." (Note: Look for Crane Data's Money Fund Portfolio Holdings dataset, with information as of February 29, 2012, to be released to subscribers tomorrow morning.)
