Two more reports analyzing money market mutual funds holdings of European-affilated debt and securities were released yesterday, and both confirmed earlier reports that money funds increased their holdings slightly in January for the first time since May 2011. Investment Company Institute Economists Emily Gallagher and Chris Plantier wrote a piece entitled, "Prime Money Market Funds' Eurozone Holdings Remain Low" while Fitch Ratings continued its recent barrage of money fund related releases with "Fitch U.S. Money Fund Exposure and European Banks: Seeking a New Equilibrium." We excerpt from both updates below.
ICI writes, "Securities of eurozone issuers accounted for 14.0 percent of assets of U.S. prime money market funds in January, up from 11.9 percent in December. This increase was driven by a rise in French assets (up from 3.2 percent to 4.6 percent) and by a rise in asset holdings of other eurozone issuers (up from 8.7 percent to 9.4 percent). The European Central Bank's massive long-term refinancing operation on December 22 provided nearly 500 billion euros in three-year liquidity to the eurozone banking system. Market sentiment has improved since this policy action, leading some commentators to suggest that U.S. prime money market funds' increase in eurozone holdings in January reflects a renewed appetite for risk."
The piece continues, "A closer look, however, undercuts that argument. In particular, the maturity of prime money market fund holdings of French issuers continued to fall in January. At the end of January, 85 percent of these French holdings matured in seven days or less, up from 78 percent at the end of December. These funds' French holdings are considerably more concentrated at the short end of the maturity scale than are their German or British securities. What's more, these funds' French holdings of securities with maturities beyond seven days were little changed in dollar terms, suggesting that prime money market funds remain cautious."
ICI explains, "With this in mind, the small increase in prime money market funds' holdings of eurozone issuers should not be viewed as an increase in willingness to take on risk. Instead, the increase probably has more to do with typical year-end effects in December's holdings data. In October and December, we discussed how portfolio managers of U.S. prime money market funds have addressed the ongoing debt crisis in the eurozone. As [a chart] of U.S. prime money market funds' holdings of eurozone issuers from November 2010 to January 2012 shows, January's increase in eurozone securities to 14.0 percent marked a return to the November level (14.2 percent)."
Finally, ICI's update adds, "A December drop in eurozone holdings may well be typical and one month's data certainly does not make a trend.... [W]e would be extremely careful in calling a turning point in prime money market funds' willingness to hold eurozone issuers based solely on January's holdings data. What's probably more significant is that prime money market funds' eurozone holdings remain low and short-dated as fund managers continue to act prudently in the face of the ongoing debt crisis."
The Fitch update tells us, "U.S. prime money market fund (MMF) exposure trends appeared to stabilize, a possible indication of an emerging equilibrium after several months of relatively large reductions in allocations to euro zone banks. MMF exposures to euro zone banks increased by 15% on a dollar basis since end-December, driven by increased exposure to French banks. Exposure to European banks outside the euro zone remained steady at 22% of MMF holdings, while exposure to banks in Australia, Canada, and Japan declined modestly relative to end-December. In other signs of recent stability, MMF holdings of Treasurys and agencies remained elevated despite their low yield, and the top 15 largest bank names were unchanged relative to end-December."
Their report says, "Exposure to euro zone banks is currently about 11% of MMF assets, down from 31% as of end-May. This reduction was largely driven by MMF risk aversion, as the funds in Fitch's sample had historically allocated more than 30% of its assets, on average, to euro zone banks between end-2006 (the beginning of Fitch's period of study) and mid-2011. Recent ECB actions (e.g., the LTRO) may have mitigated some investor concerns and helped to stem the MMF outflows from euro zone banks. It is unclear, however, whether the recent increase in exposure to euro zone banks represents a turning point or the emergence of a new equilibrium."
Finally, Fitch explains, "There are signs that MMFs remain cautious in their posture to European banks, including a historically high 27% of exposure in the form of repurchase agreements (repos). The quality of collateral often varies across repos.... However, roughly 90% of repos with French banks were backed by Treasury and agency collateral, an indication of continuing MMF risk aversion towards these institutions. Even if MMF risk aversion were to soften, euro zone banks might have diminished appetite for MMF funding going forward. First, several banks experienced adjustment challenges in the wake of last year's MMF pullback, resulting in some cases in a search for alternative sources of funding and deleveraging of USD-intensive businesses."
