Last week, Deutsche Bank Economist Bill Prophet gave a rare intra-month update on portfolio holdings of the largest money funds. His piece, "Throwing Out the First Pitch," says, "Although the mid-month data (as opposed to end-of-month) is generally wanting, we are seeing clear evidence that money funds are beginning to lend to Europe again. Having said that, it looks like French banks aren't participating just yet." We excerpt his recent comments below. We also briefly discuss the ICI's latest "Portfolio Holdings of Taxable Money Funds" dataset, which shows a plunge in Repo holdings and a jump in Treasuries, Agencies and Cash in December.
Prophet's "The Latest on Money Funds" comment explains, "We don't normally do this, but we have received so many questions over the past few days about money fund lending to Europe -- with some even asking if French banks are back in the game -- that we decided to update our monthly series on this dynamic (or at least to the extent that we can using mid-month releases). Be aware however that since we are trying to do this before month-end, our data is pretty spotty.... [T]hese are indeed mid-month numbers so we are not able to see what has happened over the last couple of weeks of the month. But anyway, the six funds in our universe have $260bn in assets which accounts for about 20% of the entire prime fund industry."
He continues, "[H]ere is what the data is telling us: In short, money fund lending to European banks is definitely stabilizing, and in some cases it's even increasing. For the record, we do not yet see any evidence of increased lending to French banks (we're not saying it's not happening; it's just not showing up in our sample), but we are seeing improvements elsewhere. We show the geographic breakdown of the changes in money fund holdings of European bank CDs for the past few months in Chart 1.... Notice how unsecured funding markets have recently improved for British, Swedish, and (ahem) German banks. What's even better news however is that the term of these unsecured loans is starting to pick up as well."
Finally, Prophet comments, "[T]here was a pretty dramatic decline in these "long-maturity" loans between May & December, but then there has been a meaningful rebound in this series during January.... What's noteworthy however is that while unsecured lending is still largely within a stabilization phase, we're beginning to see broad and unambiguous increases in secured lending to European banks. This is what we show in Chart 3; notice how things actually stabilized back in Sep and have been improving ever since. We interpret this as a leading indicator of unsecured lending. After all; increased risk tolerance has to start somewhere."
The Investment Company Institute's latest portfolio composition statistics show that Repurchase Agreements remained the largest holding among money funds in December at 20.6% of assets ($495.2 billion), though Repo declined by $44.4 billion, or 8.2% during the month. `Treasury Securities remained the second largest segment at $452.6 billion, or 18.9%; they increased by $21.3 billion in December. The third-largest slice, Certificates of Deposit, increased slightly (up $8.4 billion) to $431.5 billion (18.0%).
Government Agency securities, which represent $17.2% of assets ($412.1 billion) also saw a jump in holdings; they increased by $27.8 billion, or 7.2%. Commercial Paper declined slightly in December. CP accounts for 15.1%, or $362.4 billion of taxable money fund holdings. Notes represent 5.5% of assets ($131.3 billion), Other holdings represent 4.0% ($95.2 billion), and Cash Reserves represent 0.8% ($19.4 billion). (Note: Crane Data's January 31 Money Fund Portfolio Holdings are scheduled for release on Feb. 13.)
