European Money Market Funds Switch Strategy
European money market funds (MMFs) are reducing their exposure to financials, opportunistically reallocating towards non-financial corporates, sovereigns and government agencies, reports Fitch.
In its latest quarterly publication on European MMFs, the credit ratings agency (CRA) said that in Q4 of 2014, money funds reduced their allocation to financials to a two-year low, as they adjusted to supply dynamics, seizing investment opportunities in corporate, sovereign and government agency assets. Financial exposures, both secured and unsecured, were reduced by 2% over 4Q14 and by 5% in 2014, to 73.6% on average.
This was most pronounced for euro and sterling funds. Euro short-term issuance from corporates, such as Procter & Gamble, Unilever and Danaher, increased and was embraced by money funds. Sterling funds found opportunities in UK sovereign securities and government agencies.
Overnight and one-week portfolio liquidity levels were reduced over the quarter and more generally over the year across all currencies. This was driven by a combination of search for yield in longer-dated assets, difficulties to place at the short-end in euro and management of year-end investor cash-flows.
Portfolio maturities have increased on average across European MMFs. The move was most notable for euro funds as the prospect of prolonged negative euro short-term rates led to increased portfolio weighted average maturities (WAM) to 44 days on average, which is 10 days longer than a year ago.
Among issuers held by Fitch-rated MMFs, 17 banks are on negative outlook. These primarily include Rabobank and Standard Chartered Bank, whose outlooks are driven by the respective banks’ standalone strength, and ING Bank, Deutsche Bank, ABN Amro Bank, Lloyds, Société Générale and Bank of America, whose outlooks reflect Fitch’s view of declining state support.
Fitch adds that the European Central Bank’s (ECB) quantitative easing (QE) programme could keep yields on euro MMFs ultra-low for a prolonged period of time, which could turn negative from their current average level of 0.1bp. Assets in constant net asset value (CNAV) funds denominated in euro nevertheless remained fairly stable in Q4 of 2014, and even grew 22% over the year as low-risk, liquid alternatives are limited and MMF yields remain on average 17bp above the 7-day Ondon interbank bid rate (LIBID). Weekly asset movements have, however, been more volatile for euro funds this quarter compared with other currencies.
Yields of MMFs denominated in sterling and US dollar edged up towards the end of the year, reaching on average 38 basis points (bp) and 6bp respectively. This was modestly above their benchmark’s yields. Assets of European CNAV funds grew 2% in Q4 2014 and close to 5% over the year, driven by euro and sterling MMFs.