Fitch-rated US Money Market Funds Shift Portfolios Away from Repo Allocations

Fitch-rated US prime money market funds (MMFs) decreased their portfolio allocations to repurchase agreements (repos) during the first quarter of 2011, reversing last year’s trend, according to a new report by Fitch Ratings.

Fitch-rated prime MMF allocation to repos decreased to approximately 15% of total assets from an all-time high of 21% in July 2010. The decrease in repos were offset by higher allocations to time deposits (TDs), which increased to 12% of funds’ total assets from approximately 6% in July 2010. While US MMFs have historically preferred repos over TDs, Fitch notes that with upcoming changes to the tri-party repo market, MMFs are increasingly revisiting other means of daily liquidity management mainly offered by offshore subsidiaries of US and foreign banks.

Credit risk premiums increased during the first quarter of 2011 amid ongoing political unrest in the Middle East, the natural disaster in Japan and general credit concerns related to European and other sovereigns. Ongoing regulatory activities also remain a source of uncertainty with continuing debate about the structure of the money market fund industry and its degree of systemic risk.

Another recent development was Fitch’s update of its MMF rating criteria on 4 April 2011 as part of its periodic review of all rating criteria. The updated report provided added transparency and clarified certain elements of Fitch’s criteria, however the core analytical framework outlined by Fitch in October 2009 remains unchanged, and there were no rating implications for Fitch-rated funds.


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