J.P. Morgan Securities released its latest monthly "Update on prime money fund holdings for August 2012" yesterday, which showed increases in money fund assets, increases in European-affiliated holdings, and increases in average maturities. The latest "U.S. Fixed Income Strategy" research from Alex Roever, Teresa Ho and Chong Sin says, "Prime MMF assets under management rose by $16bn (1.1%) in August, a month that was mostly uneventful for the money markets except for the anticipation leading up to the eventually cancelled SEC vote to release money fund reform proposals. ECB president Mario Draghi's "whatever it takes to preserve the euro" speech at the end of July removed a significant amount of risk from the Eurozone peripheral sovereign markets and in turn, helped credit conditions improve for Eurozone banks. Uneventful is good for the money markets and some funds took advantage of the summer lull to add to their Eurozone bank positions and extend maturities."
The update continues, "Total net bank exposures in prime MMFs increased by $17bn according to our estimates, driven by increases in unsecured CP/CDs and repo and offset by decreases in time deposits. Overall ABCP exposures sponsored by banks remained flat month-over-month. In general, funds favored switching out of overnight time deposits (unsecured) to overnight repo (secured) for liquidity, which continued to trade at elevated levels in August with overnight GC repo averaging 20bp in the month. Also, some funds extended maturities slightly, primarily via unsecured CP/CDs."
J.P. Morgan explains, "Eurozone bank exposures increased by $16bn with German bank exposures increasing by $12bn. French bank exposures also increased marginally by $3bn. As mentioned above, funds favored secured liquidity via overnight repo and some extension in maturities via unsecured CP/CDs. Funds added exposures to Deutsche Bank ($12bn), Credit Agricole ($2bn) and BNP Paribas ($2bn) among others. Year-to-date, Eurozone bank exposures are up by $29bn, mostly through repo but are down by $132bn on a year-over-year basis."
They tell us, "Non-European bank exposures increased by $10bn with increases to Japanese and Canadian banks offset by reductions to US banks. Funds continued to add to their Japanese bank exposures, increasing holdings by $11bn in August, primarily via unsecured CP/CDs. Year-to-date, Japanese bank exposures saw the largest increase at $38bn compared to bank exposures from other regions. On a year-over-year basis, Japanese bank exposures increased by $76bn. Prime MMFs currently hold the largest amount of unsecured exposures with Japanese banks followed by Canadian banks and Australian banks."
Roever, et. al., also write, "Prime MMF allocations to overnight repo increased to about $200bn in August, up about $25bn month over-month and now represents over 70% of total repo holdings in prime MMF portfolios. Overnight repo holdings remain elevated even as regulatory pressures are forcing broker/dealers to term out their funding liabilities. Basel III's Liquidity Coverage Ratio (LCR) in particular would force broker/dealers to hold government securities or cash for expected cash outflows over a 30-day horizon. The bulk of repo funding which is overnight to inside a week would fall under LCR, making it costly for broker/dealers to fund shorter than 30 days. We expect such supply pressures on repo over the next several months to lead funds to enter into more term repo trades and seek other sources of overnight liquidity. With repo being the staple overnight liquidity product for MMFs, supply pressures will pose a challenge for fund managers to maintain their daily and weekly liquidity requirements under Rule 2a-7 (10% and 30% of AUM, respectively). As government securities count towards MMF liquidity buckets, it's likely that prime MMF allocations to Treasuries and agencies will see gradual increases over the next several months."
They add, "Global bank exposures in prime MMFs have been fairly stable over the past year ranging from $970bn to $1,060bn and averaging about $1,030bn during that time period. In spite of the stability, not only has the mix of bank holdings have changed but the type of holdings have shifted as well as prime MMFs have increasingly favored secured forms of debt versus unsecured. If we look closer at the regional breakdowns, we see this shift has been significant for European banks, especially those in the Eurozone. The increase in secured holdings has been driven by repo and particularly those collateralized by Treasuries and agency MBS. Backed by high quality collateral and executed via triparty, repo provides additional layers of safety for MMFs over unsecured forms of debt, which given the macro risk uncertainty makes repo especially attractive. Combined with elevated repo rates since the start of Operation Twist, it's no wonder funds have favored repo. ABCP holdings, on the other hand, have been decreasing along with supply and we expect this trend to continue."
Finally, the update says, "Prime MMFs extended maturities for their unsecured bank CP/CD holdings slightly in August but average final maturities still remain under 3 months. Average maturities of European bank unsecured CP/CD holdings are at about 2 months and those of non-European unsecured CP/CD holdings are just below 3 months.... The month of August, for the most part, provided a nice respite for the money markets. With the SEC's money fund reform proposals off the table for now and the euro breakup risk significantly reduced, two of the largest issues in many fund managers' minds over the past year loom less large. That does not mean challenges do not remain for MMFs. In our view, further money fund reforms are not completely off the table and could find their way back on under the direction of the Financial Stability Oversight Committee (FSOC), perhaps sometime after the Presidential elections. Also, as we've written here and in prior publications, the shrinking universe of investible money market supply for many investors including MMFs remain a challenge."
Subscriber Note: Crane Data's Money Fund Portfolio Holdings with information as of August 31, 2012, will be sent to Money Fund Wisdom clients on Thursday morning, and our new Money Fund Portfolio Laboratory transparency and analytics module will also be updated then. Contact Pete (508-439-4419) to request a copy of our latest holdings dataset. Our MFI International "offshore" portfolio holdings will be released Friday.
