J.P. Morgan Securities LLC's released a special "US Fixed Income Strategy Short-Term Fixed Income Markets Research Note" entitled, "Update on prime money fund holdings for September 2011," which shows that money market funds continued to reduce their exposure to European holdings in September." The piece, written by Alex Roever, Teresa Ho, and Chong Sin, says, "We estimate that prime money market funds (MMF) cut holdings of Eurozone bank debt by $72bn during September 2011 across CP, CD, ABCP, repo, time deposits, and other notes. Since the end of May 2011, prime MMF cut their Eurozone exposures roughly in half, allowing $237bn of net exposures to mature. At the end of September, prime MMF continued to hold $242bn of Eurozone bank credit."
JPMorgan's update, the first to analyze September holdings data, explains, "The pace of redemptions from prime MMF was slower in September than June and July but picked up compared to August. In aggregate, prime MMF assets under management declined by 2.3% during September, slower than the declines seen in June and July (5.2% and 4.0%, respectively) but faster than declines seen in August (0.5%). Through last Friday, October 7, prime funds are down $190bn or 11.6% since May. All of this has come out of institutional class shares ($194bn), while retail funds have experienced small gains in assets since May. Since the increase in the US debt ceiling on August 2, government securities focused MMF have seen $122bn of inflows, as institutional shareholders have rotated out of prime funds and into government funds."
The piece continues, "French banks remained the largest national concentration within the Eurozone, registering $93bn at the end of September. However, during the month, prime funds took $61bn away from allocations to French banks and have chopped $147bn (61%) since the end of May. The average final maturity for French banks' CP and CD was only 39 days at the end of September or about half of what it was at the end of May."
It also says, "Outside of the Eurozone, prime funds generally added to bank exposures last month. While concentrations to non-Eurozone European banks were basically flat, Japanese and Canadian bank exposures grew at $17bn and $7bn, respectively. These exposures predominantly grew through unsecured CP and CDs. Exposures to US banks were little changed, suggesting that Moody's September 21 downgrades of BAC, C, and WFC had little immediate impact on investors."
Finally, Roever & Co. tell us, "We think the September data illustrate the degree to which Eurozone headline risk continues to dominate MMF manager activity. Institutional class shareholders remain wary of Eurozone credits, given the ongoing lack of resolution to the peripheral sovereign debt crisis. In spite of the ECB's unlimited liquidity backstop of Eurozone banks, we believe MMF managers will continue to avoid these banks for fear of losing more shareholders. We doubt prime MMFs will return in the earnest to the sector until a clear and credible resolution to the root fiscal crisis is achieved. In the meantime, vague agreements-to-agree on a solution are unlikely to stop the bleeding of private credit away from Eurozone banks. But, with over half of the remaining Eurozone bank credit held by prime funds set to mature before the end of October, even an immediate resolution may not forestall further declines."
In a separate piece, Deutsche Bank's William Prophet also did some early sampling of September holdings in his piece this morning, "Bad for Business." Prophet writes, "Whereas it was once their number one asset, U.S. money funds have very obviously decided that unsecured loans to European banks are just bad for business. And more specifically; the month-end holdings now confirm that risk reduction along this front continued during September.... The trend that has us most concerned is the maturity transformation within money fund CD portfolios. Just to cite one example; whereas 35% of their French bank CD holdings had a maturity over three months back in June, now almost none of them do.... There was a time—when Euro-region CD's were the number one asset on U.S. money fund balance sheets. Over the past few months however, these holdings have been cut by over 40% -- and the trend is showing no sign of letting up."
