Moody's: Supply and Yield Will Suffer
Moody's issued a report last week entitled, "Money Funds' Supply and Yield Will Suffer Further Amid Drop in Short-Term Issuance by Banks Due to Basel III." It said, "Euro and Sterling money market funds have significantly reduced their exposure to financial institutions in recent years, offsetting the reduction mainly with government securities and reverse repurchase agreements (repos), says Moody's Investors Service. "With regulators pushing banks to reduce short-term wholesale funding, and bank credit quality deteriorating due to the depressed global economic environment between 2009 and 2012, money funds have had to find alternative sources of investments," says Marina Cremonese, a Moody's assistant vice president and co-author of the report. Euro MMFs' direct exposure to financial institutions has fallen to 54% of funds' assets under management in June 2014 from 75% in June 2010, while investments in government securities and repos have increased by 13% and 7%, respectively. Sterling MMFs have reduced their exposure to financial institutions to 72% in June 2014 from 82% in June 2010. For US MMFs, investments in financial institutions are roughly flat from four years ago. The shrinking investment supply has had a lesser impact on US MMFs as they started off with a lower exposure to financial institutions compared to Euro and Sterling MMFs, and they also benefited from the Fed's reverse repo facility. Moody's expects a further squeeze in the issuance of short-term bank securities when Basel III rules are actually implemented starting in January 2015. As a consequence of the worsening supply/demand imbalance, MMF managers will have to give up a few basis points of return in order to preserve diversification and the short maturity profile of their funds." In other news, on Friday the European Central Bank released the "Results of the Euro Money Market Survey 2014." The release explains, "The European Central Bank (ECB) is publishing the results of the "Euro Money Market Survey 2014", which highlights the main developments in the euro money market in the second quarter of 2014, comparing them with those in the second quarter of 2013."
