Fitch Ratings sent out a press release entitled, "Fitch: Market Sentiment Improves Among U.S. Money Market Funds; Regulatory Uncertainties Persist along with its "U.S. Money Market Funds Sector Update: First-Quarter 2012." The release says, "Fitch-rated U.S. money market funds (MMFs) selectively increased their holdings of eurozone banks during the first quarter of 2012, according to Fitch Ratings. Fitch believes improved eurozone confidence by MMFs results in part from the stabilizing effects of the European Central Bank's long-term refinancing operations. Allocations to banks in France, Germany, and Netherlands -- the three largest allocations for MMFs in the eurozone -- increased to 19.7% at the end of February 2012, up 4.1% from 15.6% at the end of 2011. Investments in French banks remain well below the December 2010 level."

Fitch's press release continues, "Underscoring their defensive posture to liquidity management, Fitch-rated prime MMFs held 30% of their portfolios in daily liquid assets. In February 2012, MMFs invested 18.3% of their portfolios in repos, including 12.5% in repos backed by the U.S. government and 5.8% backed by other types of collateral."

The release adds, "Allocations to asset-backed commercial paper (ABCP) remain stable at 7-8% of fund's assets, on average, despite a decline in ABCP outstanding. Longer term, ABCP holdings have declined, offset by rises in repos, government holdings and variable rate demand notes (VRDN).... Regulatory uncertainty remains a key challenge for the sector, with expected publication of the SEC's proposal on U.S. MMF sector structural reforms due in the second quarter of 2012."

The full "Sector Update" says, "The portfolio composition of Fitch-rated prime MMFs has shown the long-term shifts in asset types. This shift includes a significant long-term decline in ABCP investments, notwithstanding a stable allocation to this asset class in the recent months, partially offset by an increase in VRDNs, higher allocations to repos backed by both government securities and other types of collateral, and a higher level of U.S. government securities holdings. During the first quarter of 2012, Fitch-rated prime MMFs invested primarily in seven major security types (see Figure 6): certificate of deposits and commercial paper, including ABCP, repos, U.S. government securities, corporate notes, and variable rate demand notes (VRDNs)."

Fitch also writes, "Short-term interest rates continue to rebound from their recent historic lows during the first quarter.... Figure 8 depicts a slightly higher average seven-day annualized yield produced by prime institutional MMFs against the backdrop on the Fed funds and overnight LIBOR rates. Helped by an uptick in yield, expenses charged for prime government institutional funds have also slightly risen. Prime institutional MMFs' expense ratios averaged 23 bps at the end of March, representing an average increase of 2 bps since the fourth quarter, when the average expense ratio stood at 21 bps."

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