Fitch: MMFs Ready for Rising Rates
Fitch Ratings wrote Friday, "U.S. Money Funds Well-Positioned for Gradual or Sharp Interest Rate Rises." The brief says, "U.S. money market funds are well-positioned to manage risks associated with rising interest rates, either a modest rise or a sharper rise accompanied by weaker economic conditions, according to Fitch Ratings. As noted in a recent report on interest rates, Fitch's base case scenario assumes the completion of the Fed's tapering program, strengthening world economic growth over 2014-2016 and a gradual tightening of monetary policy over the next 12 months. Fitch's stress case scenario involves a sharper hike of interest rates amid weakening or stagnant economic growth, among other factors. U.S. money funds have recently begun adjusting their portfolios in anticipation of rising interest rates, with prime funds lowering their weighted-average maturities (WAM) to an average of 42 days. Regulatory rules and Fitch's rating criteria constrain money funds' WAMs to limit exposure to interest rate risk. The current limit means that a money fund portfolio with a 60 day WAM can withstand an instantaneous 3% interest rate increase before 'breaking the buck', all else being equal. Fitch notes that there is considerable variability among funds with regard to their current WAM positioning and portfolio strategies in a rising rate environment. Approximately 36% of money funds have WAMs between 41 and 50 days, while only 17% of funds operate with WAMs greater than 50 days. The full report is available at www.fitchratings.com. This is part of a series of reports by Fitch looking at interest rate sensitivities across various U.S. analytical sectors." In other news, see Reuters published "Money market inflows jump in latest week - Lipper", which says the large amount of inflows into money market funds last week may be partly attributable to investors fleeing PIMCO bond funds for MMFs. Writes Lipper, "Investors in U.S.-based funds poured a net $18.9 billion into money market funds in the latest week, double the previous week's amount, amid record withdrawals from Pimco's flagship fund previously run by Bill Gross.... Much of that cash surge is likely money that rushed out of Pimco after the Gross shock, said Patrick Keon, a research analyst with Lipper. "I think that the money markets category is a good bet for the bulk of that money" coming out of Pimco, he said. It's possible that investors are "parking the money in money market funds until they do more research," he said." (Note: Crane Data doesn't believe that PIMCO flows were a major factor in last week's asset jump, since the money fund increases.)
