Late last week, Fitch Ratings released a report entitled, "U.S. Money Market Funds: Third-Quarter Review and Outlook, which was subtitled, "MMFs Conservative on Credit; Extend Maturities." Under the heading, "MMFs Favor North America and Japan" it says, "U.S. prime money market funds (MMFs) rated by Fitch Ratings continue to favor investments in Canadian and Japanese entities, which together account for nearly 23% of the rated funds' assets. Recent Fitch rating actions on the long-term ratings of top-tier Japanese banks have not affected this trend. In addition, MMFs seek U.S. exposures, which mainly come in the form of U.S. government securities and repurchase agreements (repos)."
The report also comments, "MMFs Stick by European Banks: During the third quarter, MMFs have maintained a steady eurozone exposure of approximately 18.3%. MMFs prefer secured investments such as repos, which reached 27% of the total investments in eurozone banks.... Nonfinancial commercial paper (CP) outstandings are up by 17% this year helped by strong demand from MMFs and other short-term investors. Total CP outstanding nevertheless has declined, mainly due to a 14% decline in asset-backed commercial paper (ABCP). In August 2012, Fitch-rated prime MMFs allocated 6.4% of their assets to ABCP and are expected to continue the declining trend."
Fitch continues under "Fragile Growth Prompts More Easing," "On Sept. 13, 2012, the Federal Reserve (Fed) announced its third round of quantitative easing through purchases of agency mortgage-backed securities until the labor market improves. The exceptionally low interest rates through at least mid-2015 are expected to renew pressure on MMF yields." The report adds on "MMF Consolidation Picks Up," "Even sizable MMF sponsors are not immune to the challenges of operating in a prolonged low-yield environment and the need to achieve scale. Fitch expects to see more fund consolidation, as smaller fund complexes weigh the cost/benefits of their MMF platforms."
Finally, the special report says that "Further MMF Reform Remains Possible. It explains, "On Aug. 22, 2012, SEC Chairman Mary Schapiro announced that the SEC will not release for public comments the much debated MMF reform proposals. Following this announcement, Treasury Secretary Timothy Geithner urged members of the Financial Stability Oversight Council (FSOC) to recommend that the SEC should still proceed with the MMF reform. On Oct. 9, 2012, the International Organization of Securities Commissions (IOSCO) published recommendations for a common set of regulatory standards for MMFs."