Fitch Ratings published a new report yesterday entitled, "MMFs Demonstrate Ample Liquidity," which examines liquidity, maturities, shadow NAVs and portfolio practices over the past two years. Fitch's press release on the report, entitled, "Fitch: Stability Holds for U.S. Money Market Funds Despite Market Volatility," says, "U.S. prime institutional money market funds (MMFs) remain focused on high quality assets and relatively short duration amid ongoing market uncertainties, according to Fitch Ratings. Since May 2011, U.S. prime MMFs have been affected by cash outflows related to MMFs' exposure to eurozone financial institutions. Rated MMFs have been able to handle these outflows with available liquidity without reliance on secondary market liquidity. In addition, shadow net asset values (NAV) remain stable despite market uncertainties associated with the European sovereign debt crisis."
The release adds, "Fitch attributes this stability to conservative portfolio management practices exhibited by Fitch-rated prime MMFs, which are managed with substantial liquidity cushions relative to Fitch rating criteria and regulatory requirements. For example, as of July 2012, MMFs invested conservatively in daily and weekly liquid assets at the levels of 20% and 46% of their assets, respectively. On average, MMFs' weighted average maturity and weighted average life equaled 44 and 67 days, respectively. The eurozone crisis, negative credit migration among global financial institutions, and longer term U.S. fiscal trends will further challenge MMFs. Fitch believes MMFs will need to continue to focus on conservative liquidity, interest rate and spread-risk management to position their funds as investors react to market events."
The full report comments, "Shadow NAVs have remained stable despite market uncertainties associated with the European sovereign debt crisis. Fitch attributes this stability to conservative portfolio management practices exhibited by its universe of rated prime MMFs, which currently are managed with a substantial liquidity cushion relative to the agency's rating criteria and regulatory requirements." (The report shows a chart of shadow NAVs, which clearly have not budged.)
Fitch continues, "MMFs remain relatively well positioned for potential withdrawals. In particular, during summer 2011, when investors' concerns about Eurozone banks resurfaced, prime MMFs accommodated cash outflows of approximately $135 billion within July and August of 2011, or 8.2% of their assets as of June 2011 (source: iMoneyNet). The chart ... indicates that despite these outflows, the worst-case shadow NAV decline did not exceed 10 basis points. The short duration of MMFs' holdings further supports stable NAV as assets mature at par."
It adds, "Continuing deleveraging of the banking system and a lack of corporate issuance of MMF-eligible securities has contributed to decreasing availability of short-term high quality assets. Together with the persistently low interest rate environment, these developments resulted in higher demand for existing yield producing assets and their price appreciation. The chart ... illustrates the increase in shadow NAV as reflected by their maximum values during the last two years.... During the last two years, U.S. prime MMFs have been consistently focused on maintaining high levels of available liquidity given continuing market volatility associated with the lack of convincing steps toward a resolution of the Eurozone crisis."
Finally, Fitch writes, "During the last two years, prime MMFs have remained conservatively positioned with respect to interest rate and spread risks as reflected by their average WAM and WAL. WAM measures the funds' sensitivity to interest rate risk, while WAL indicates the funds' exposure to spread risk mainly related to volatility of credit assets. Amendments to Rule 2a-7, which governs activities of U.S. MMFs, implemented in May 2010 restricted maximum funds' WAM to 60 days and introduced a limit on WAL at 120 days. In line with rating criteria, 'AAAmmf' rated funds manage their portfolios within the same WAM and WAL parameters."