Early reports show that money market mutual funds continued gradually reducing their European exposure overall in December, and their unsecured exposure to any peripheral European and French banks is now virtually zero. Deutsche Bank's William Prophet wrote a piece entitled, "Springtime in January," earlier this week analyzing December 31 holdings of the largest money funds, and J.P. Morgan Securities' Alex Roever released his latest look at holdings late yesterday. Both show that any direct danger from European holdings to money market funds is largely passed, though we may wait another month to sound the all clear. We excerpt from these below. (Note that Crane Data's December 31 Money Fund Portfolio Holdings dataset will be released to Money Fund Wisdom subscribers tomorrow a.m.)
DB's Prophet writes, "The monthly data on U.S. money funds is finally a source of good news -- or at least it's not bad. In short, lending to Europe has stabilized. The levels are now only about half of what they were six months ago. But for the past two months now lending to European banks by the U.S. money fund industry has been flat. We show a brief history of European bank CD holdings among six of the largest funds in the industry.... Notice how lending actually went up in November and declined only marginally last month."
He explains, "This stabilization is mostly just a by-product of some big shifts in geographic exposure however. We detail the regional breakdown of the aforementioned CD holdings.... As the picture suggests, French banks in particular have been responsible for most of the big changes.... Or more specifically; between May and December there was a $98bn decline in European bank CD holdings among U.S. money funds and French banks were responsible for over 60% of that. The good news is that this simply can't go on any longer."
Prophet continues, "Indeed ... the money funds in our sample have more or less liquidated all French bank CD's from their portfolio. And that is a pretty shocking development considering that just a few months ago this was the number one asset on U.S. money fund balance sheets. Indeed if we would have known back in June that French bank risk would be completely eliminated from U.S. money fund balance sheets by January, we actually would have anticipated an even greater re-pricing in short-term rates. But anyway ... loans to banks in certain northern European regions (e.g. Germany and Sweden) have actually been going up recently. And we see no reason why that shouldn't continue for at least the next few months."
J.P. Morgan's "Update on prime money fund holdings for December", says, "Eurozone bank paper continued to roll off in December from prime money fund portfolios but has seen some slowing as nearly 70% of these exposures have been eliminated from prime fund portfolios over the course of the past year. In spite of continued reductions in Eurozone bank exposures, prime fund AUM was basically flat for the second consecutive month reflecting some level of investor comfort in the level of risk in prime fund portfolios as much of the cash that left Eurozone bank paper has been reinvested in non-European banks and other high quality products."
It continues, "Prime money funds saw relatively small net outflows of $2.6bn for the month of December, after experiencing net inflows of about $4bn in November, which was the first month of inflows since April. As we noted in our last weekly publication, the taxable money fund market experienced a significant shift in composition in 2011 with prime money funds losing $177bn in assets (-11%) and government money funds gaining $108bn in assets (+13%) (Exhibit 1) as investors sought safety from turmoil in Europe. Prime money fund balances have stabilized over the last couple of months as a great deal of Eurozone bank exposures have come off in a relatively short period of time."
Authors Roever, Teresa Ho and Chong Sin explain, "2011 marked a tremendous decrease in exposures to European bank credit (-$347bn), most of which were accounted for by reductions to Eurozone bank credit (-$331bn). By our estimates, the top 3 reductions in exposures by country of origin were to France (-$190bn), Germany (-$60bn), and the UK (-$52bn). The top 3 increases in exposures by country of origin were to Canada (+$45bn), Japan (+$40bn), and Sweden (+$33bn). Although increases to bank exposures in these banking jurisdictions offset some of the massive declines in European bank exposures, much of the cash that left European banks were reinvested into high quality assets such as Treasury bills and coupons, agency discount notes and coupons, and muni variable rate demand obligations."
They also write, "Exposures to French bank credit continued to decline in December (-$12bn) with much of the decline accounted for by declines in CP/CD exposures (-$10bn). French bank balances now stand at $32bn, a far cry from what it was at the end of 2010 ($222bn), which was at the time the single largest concentration by country of origin. Other notable declines included German and UK exposures, which were $10bn and $25bn, respectively. The large decline in UK exposures was primarily driven by declines in repo exposures, which is likely temporary as the reduction was year-end dealer balance sheet driven."
Finally, JPM's "Short Duration Strategy" comments, "Prime fund managers maintained high levels of liquidity in their bank paper holdings in December. The average final maturity of Eurozone bank CP/CD holdings dropped to 52 days. Notably, the average final maturity of Non-Eurozone European bank CP/CD holdings was even lower at 38 days. This is partially due to the fact that our Eurozone figures are inflated by the inclusion of Dutch bank floating rate CDs. However, if we compare the average final maturities of CP/CD holdings in French, German, Swiss, and UK banks, we see that the average final maturities were more comparable, ranging from 28 to 37 days. Our expectation is that prime fund managers will maintain short maturities for their European bank holdings in the near term."
