The latest batch of Money Fund Portfolio Holdings show that funds reduced their European exposure substantially in June as outflows hit the sector. J.P. Morgan Securities' "Update on prime money fund holdings for June 2012" comments, "Eurozone bank exposures declined by $47bn in June according to our estimates, driven by reductions in unsecured CP/CD and repo by $29bn and $19bn, respectively. Overall changes to ABCP and repo were minimal. June's decline in Eurozone bank holdings brings the total slightly below that of 2011 year-end and marks a $58bn decline from February after a LTRO induced ramp up in Eurozone bank holdings from December 2011 to February 2012. Despite the decline, French bank holdings of $49bn remain $17bn above 2011 year-end levels." (Note: Crane Data released its June 30 Portfolio Holdings and updated its new Money Fund Portfolio Laboratory yesterday, but our "Pivot" Tables & Reports are due out later this morning.)
JPM's Alex Roever, Teresa Ho and Chong Sin write, "Reductions to Eurozone banks in June were primarily driven by declines in Dutch and French bank unsecured CP/CD holdings and German bank repo holdings. Reductions in Dutch and French bank CP/CD holdings were isolated to a couple of large prime fund complexes while reductions in German bank repo holdings were fairly broad-based. Reductions in Eurozone unsecured paper likely reflects a return to a more conservative stance many MMFs are taking with ongoing anxiety surrounding the Eurozone and its banks. Although Dutch banks like Rabobank are still among the highest rated large banks in the world, the search for quality has pushed its yields to rich levels relative to those of its peers. Some of this cash has been rolled over to Swedish and Japanese bank unsecured CP/CDs that are of similar credit quality to that of Rabobank without being part of the Eurozone."
Deutsche Bank Economist William Prophet writes in his latest comment, "He's Just Not That Into You," "We've been wondering for some time now whether U.S. money funds would once again look to pare back their exposure to European banks. There was of course a radical reduction in European lending during 2011. But things stabilized late last year and believe it or not, the trend has generally been in a holding pattern ever since. But we're beginning to see signs that this is changing. In particular, there was a meaningful decline in both secured and unsecured lending to European banks during the month of June with loans to Europe down some 35% over the past two months (among the funds in our universe)."
He adds, "And unlike last year when French banks felt the brunt of this re-allocation, the decline in European lending over the past two months has been relatively broad-based.... The good news is that we're not seeing a meaningful increase in borrowing rates. In other words, even though lending volumes are down, what is getting done is getting done at yesterday's level. And so in that respect, the trend in LIBOR has indeed been a fairly accurate indicator of actual bank borrowing costs."
Both strategist's commentaries also discuss the recent cut in European rates. Roever comments, "On July 5, the ECB slashed the deposit facility rate from 25bp to zero leading to several fund management companies to shut their EUR denominated MMFs to new money. (We note that the highest quality EUR-denominated MMFs (more on this below) represent only about 10% of the E1tn Euro area domiciled MMF AUM.) Closures to new money was an understandable move as some funds cannot invest at negative yields, and even those that can may not want to eat into the returns earned by the rest of the portfolio."
The JPM piece adds, "According to Crane Data's latest available holdings data for European MMFs (most of which are IMMFA MMFs) as of May 2012, EUR-denominated MMFs held about 15% of assets (about E15bn) in repo, all of them in repo backed by government or government-related collateral. Without further detail, we don't know the composition of the collateral but given the high quality nature of these MMFs, we suspect the collateral is limited to core European sovereign debt and highly rated government agencies and supra sovereigns."
Finally, Deutsche's Prophet says in his "Final Thoughts," "On a related topic, even though the ECB recently voted to reduce its bank deposit rate to 0%, we do not think the Fed will follow suit. In other words, we do not think the Fed will be cutting its IOER rate anytime soon. Indeed, eliminating interest on excess reserves would most likely put the U.S. money fund industry out of business. And while certain U.S. regulators would presumably like nothing more, we're fairly confident that this is not one of the goals of the FOMC."
