As Euro money market fund yields sink further into negative territory, European MMF providers continue to streamline fund lineups and liquidate smaller funds. This week Western Asset Management liquidated two of its "offshore" funds, Western Asset Euro Liquidity Fund and Western Asset Sterling Liquidity Fund, we learned through letters to shareholders. The letters say, "As a result of the continued low interest rate environment and recent redemptions that have significantly reduced the Fund's net asset value, the Directors have decided that the Fund is no longer economically viable and that it would be in the best interest of the Shareholders of the Fund to terminate the Fund." Earlier this month, we wrote about Federated closing its Short-term Euro Prime Fund. (See our July 2 "Link of the Day", "JPM MMFs Abandon B Shares; Federated Liquidates S-T Euro Prime MMF, and see our April 1 LOTD, "Reich & Tang Liquidates Offshore MF.") For the latest on what's going on with money funds in Europe, we also report on Fitch Ratings European MMF Quarterly 2Q '15" below, and we excerpt from a Deutsche Bank Research commentary, "Euro Area Money Market Funds: Turning the Corner?." (Note: These issues will be discussed in detail at Crane Data's 3rd Annual European Money Fund Symposium, scheduled for Sept. 17-18, 2015, at The Conrad Hilton in Dublin. Visit www.euromfs.com for more details and to register.)
Fitch's quarterly report says, "The vast majority of euro MMFs are now delivering negative yields (minus 8bp on average at mid-July), as market rates have continued to decline. Now that the move into negative territory is widespread across euro funds, the net yield decline has accelerated due to fees normalization after months of waivers. Sterling and US dollar-denominated MMFs have continued, in contrast, to see modest yield uptick. European constant net asset value (CNAV) funds' assets declined by 8% to EUR536bn in 2Q15, primarily affecting euro and sterling funds, after they had reached an historical peak at end-March."
It continues, "French VNAV funds, the second largest segment of European MMFs, stabilized at EUR310bn at end-June, with notable intra-quarter volatility. Sovereign, supranational and agency (SSA) of high credit quality and liquidity are an attractive sector for MMFs, which seized the opportunity of slightly higher yields in SSAs this quarter and increased their allocations to new highs (15%)." (Crane's Euro MMF Index shows 7-day yields at -0.11% as of July 31 and 30-day yields at -0.10%. That's down from -0.02% (for both 7- and 30-day yields) at the end of Q1 2015.)
In its quarterly report, Fitch also finalized its review of banks in 2Q leading to rating actions, including downgrades. It explains, "Fitch's downgrades most relevant to MMFs were KA Finanz (to BBB+/F2), Commerzbank (to BBB/F2), RBS (to BBB+/F2), Landesbank Baden-Wuerttemberg (to A-/F1) and Deutsche Bank, ABN Amro Bank and ING Bank (to A/F1 for all three). Certain banks that were at risk of being downgraded, were affirmed (e.g. SG, Bank of America and Morgan Stanley affirmed at A/F1) or upgraded (Lloyds Banking Group to A+/F1)." It continues, "Fitch's bank rating actions did not significantly affect MMFs, which were able to adjust their issuer selection following the agency's rating actions. Maintaining high portfolio liquidity is particularly sensitive for euro funds given current yields that may trigger large, sudden outflows that could pressure portfolio liquidity and ratings."
On "offshore" USD funds, Fitch reports, "Fitch-rated European MMFs denominated in US dollars were invested in 198 issuers or counterparties at end-2Q15, compared with 183 at the end of the previous quarter. Newly added issuers are diverse, spanning corporates, agencies and Asian banks. European banks are still the most largely held issuers across funds with Credit Agricole and BNP Paribas leading the pack, notably as largely used repo counterparties. More exposure to Asia and France: Issuers from the UK, the US and Australia materially declined in 2Q15, primarily to the benefit of Japanese, French and Chinese banks. Exposure to China is mostly achieved through investments in Oversea Chinese Banking Corp., China Construction Bank and Bank of China."
Fitch tells us, "The average portfolio asset mix was more stable for US dollar funds than it was for euro and sterling funds. There was a modest rise in SSA and corporates to 16% and 5% respectively, compensated by a decline in repo and ABCPs. The average WAL and WAM of US dollar funds have remained stable at close to 64 days and 40 days over the quarter respectively. The dispersion across funds however widened over 2Q15 as funds took differing views on when the next Fed rate rise will most likely happen. The average credit quality of US-dollar MMFs showed a gradual decline in F1+ rated assets, or equivalent, to 49% at end-June 2015, compared to 57% a quarter ago. The average credit quality remains high."
The Deutsche Bank commentary says, "Euro area money market funds have returned to growth, according to the latest ECB data. By March 2015, they managed EUR 1,032 bn in assets, up by EUR 120 bn from a year earlier. A similar surge in assets was last seen before the financial crisis, which marked the beginning of a prolonged decline. Amazingly, the upward trend in assets occurred while money market yields hit record lows, especially for the euro. So what is really behind MMF asset growth? Rather, it was mainly the euro's depreciation which inflated foreign currency assets. In the euro area, half of all MMF assets are denominated in foreign currencies. The ECB reports MMF statistics in EUR, though, i.e. half of MMF assets "grow" in line with falling EUR exchange rates."
It continues, "Investors from the euro area placed a net EUR 13 bn in fresh funds with euro area MMFs and their outstanding claims on MMFs grew in the same range. Similarly, foreign investors (i.e. those based outside the euro area) put about EUR 12 bn in new money into euro area MMFs. However, the total value of their investment in MMFs rose by a staggering EUR 95 bn. This mismatch is largely explained by the appreciation (measured in EUR) of the MMF shares issued in USD and GBP that are largely held by foreign investors."
Further, Deutsche writes, "The extremely low EUR money market rates -- below the USD and GBP rates -- are starting to trigger some changes in MMFs' portfolio structure. For instance, it has become attractive even for companies and institutions which are not based in the euro area to raise funds in EUR. Thus, it is not surprising that MMFs increased their investments in EUR-denominated paper issued by foreign debtors."
It concludes, "In sum, it is too early to say that MMFs in the euro area have turned the corner, as most of the recent asset increase reported in EUR was driven by the exchange rate effect. Nevertheless, MMFs' business model has proven to be resilient in the face of low and even negative interest rates. Although below pre-crisis levels, the recent inflow of fresh investor money was encouraging. Cash-rich investors still have to place funds regardless of the interest rate environment. Alternative investments directly in money market instruments or bank deposits do not promise better returns than MMFs, and MMFs still offer risk reduction based on diversified and liquid portfolios."
Finally, Deutsche adds, "Banking regulation might play into MMFs' hands as well, since banks increasingly refuse to accept big sums of short-term deposits from corporates. This promises higher net inflows for the MMF industry. In the medium term, though, the greater challenge may be on the asset side. Pending MMF regulation will redefine what debt MMFs are allowed to invest in, and Basel III will probably induce banks to issue less short-term debt -- hitherto the dominant asset class in MMFs' portfolios. MMFs will have to adjust their portfolios more than they did so far due to the low interest rates."
