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Prime money market funds credit profiles weaken says Moody's

Thursday, 09 May 2013
Prime money market funds credit profiles weaken says Moody's The credit profiles of euro-denominated, US prime, and sterling prime money market funds (MMFs) worsened slightly in the first quarter of 2013, says Moody's Investors Service in its quarterly MMF reports published today. According to the ratings agency  continued constraints on supply of high-quality short-term assets, and the prolonged period of low interest rates leading MMF portfolios to migrate to lower rated assets are behind the deterioration. Moody's quarterly MMF reports evaluate market trends and the evolution of MMFs' risk factors, including credit, liquidity and market risks, based on the aggregated data of Moody's rated MMFs. http://www.ftseglobalmarkets.com/

The credit profiles of euro-denominated, US prime, and sterling prime money market funds (MMFs) worsened slightly in the first quarter of 2013, says Moody's Investors Service in its quarterly MMF reports published today. According to the ratings agency  continued constraints on supply of high-quality short-term assets, and the prolonged period of low interest rates leading MMF portfolios to migrate to lower rated assets are behind the deterioration. Moody's quarterly MMF reports evaluate market trends and the evolution of MMFs' risk factors, including credit, liquidity and market risks, based on the aggregated data of Moody's rated MMFs.

Prime euro-denominated MMFs experienced further credit deterioration and maturity extensions in Q1, largely driven by the prolonged low rate environment and constraints on supply of high-quality assets. Their credit profiles saw a modest deterioration in Q1 2013, reflected by the decrease in investments in securities rated Aaa, Aa1 and Aa2, claims Moody's. Overnight liquidity decreased significantly to 30.5% of assets under management (AUM), after it peaked at 37.4% at end-2012, due to the continued pressures on funds' yields, and the resulting need for funds to invest their cash in higher- yielding instruments, it adds.

The low interest-rate environment and low yields across the sector prompted a decrease in euro MMFs AUM to 74.8bn. The increased exposure to relatively long-dated securities—combined with the modest credit profile deterioration—increased funds' sensitivity to market risk. As the credit pressures on European banks continue, funds' aggregate exposure to European financial institutions decreased 20% to €29bn at the end of March from €36bn at the beginning of the quarter. Exposure to UK financial institutions decreased significantly by 51%, followed by German (-27%) and French financial institutions (-10%).

Meanwhile, there has been  a modest credit deterioration, as 2.2% of investments in US domiciled funds and 3.8% in offshore domiciled funds moved from Aaa and Aa-rated securities to A-rated securities. Approximately 23% of investments in all Moody's-rated MMFs were rated Aaa, says Moody's. Overnight liquidity remained high, at around 39% of US domiciled fund assets and 34% in offshore domiciled funds on average.

In addition, the funds' sensitivity to market risk increased modestly in this quarter due to the increased exposure to slightly longer-dated securities combined with the modest deterioration in funds' credit profiles.

Combined AUM of U.S. domiciled funds declined 3.5% to $662bn, while the combined AUM of European and offshore domiciled funds increased 3% to $242bn.

Moody's says that prime sterling-denominated MMFs experienced further credit deterioration and maturity extensions in Q1, largely driven by the prolonged low rate environment. Funds' credit profiles saw a modest decline in credit quality, due to the credit degradation of the UK, as reflected by Moody's downgrade of UK government's bond rating in February by one notch to Aa1. Sterling MMFs' liquidity trend has been negative throughout Q1, due to fund managers' increased investment of cash and cash-like securities in their search for higher yield. This also led to increase the funds' WAM by 3.8 days throughout the quarter. Given the increased exposure to relatively long-dated securities, combined with the modest deterioration in the credit profile, funds' sensitivity to market risk increased.

Combined AUM increased by 2.5% to GBP114.8 billion during the quarter, despite the low interest-rate environment and low yields across the sector. While exposure to European financial institutions remained stable during the quarter at 49% or GBP56 billion, there have been significant country shifts. Exposure to Dutch and French financial institutions decreased by 5% and 4%, respectively, and exposures to UK and Swedish financial institutions increased by 19% and 6%, respectively.


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