European MMFs' Appetite for Peripheral Sovereign Exposures Declines
European Money Market Funds (MMFs)have demonstrated a continued decline in their appetite for peripheral European sovereign exposures, according to Fitch Ratings, while maintaining relatively low exposure to interest rate risk. At the same time, funds have extended their weighted average life (WAL) through investments in floating-rate notes (FRNs) and, as a result, have taken on somewhat higher spread risk on selected names.
As market concerns over some European sovereigns persisted, MMFs have continued to avoid peripheral European countries such as Portugal, Ireland and Greece. Investments in Italian and Spanish names have been reduced, on average, down to 1.8% and 1.5% respectively, at end-February 2011 relative to about 4% for each at end-September 2010, and in any case remained focused on those with the strongest fundamental credit profiles.
MMFs’ average exposure to interest rate risk has remained at relatively low levels, with weighted-average maturity to reset (WAMR) medians at around 34 to 38 days, despite MMFs managers’ expectations of stable euro, sterling and US dollar policy rates at least until 3Q11. This was before the European Central Bank (ECB) surprised the market in early-March by indicating it may raise its policy rate as early as April. Cautious positioning on the short-end of the yield curve reflected ongoing concerns over some European sovereigns and investors’ redemption activity.
“Over the past five months, the evolution of European MMFs’ WAL and portfolio credit factor, which evaluates credit risk based on asset maturity and credit quality, highlights increased appetite for longer-dated securities including FRNs, most notably among euro and US dollar MMFs,” said Charlotte Quiniou, director in Fitch’s fund and asset manager rating team. “This reflects more confidence in selective investments in relatively longer-dated securities with increased positions in up to one-year FRNs in a number of funds.”