Fitch: European MMFs Switch to Longer-dated Non-bank Assets

European money market funds (MMFs) are reallocating their portfolios towards longer-dated assets issued by highly-rated supranationals, government agencies, sovereigns and corporates, while maintaining high overnight liquidity amid sharply declining yields, reports Fitch Ratings.

However, the credit ratings agency (CRA) adds in its sector update that MMFs’ strong demand for such assets is still far from being satisfied, given limited short-term market supply.

To preserve MMFs’ yield in the current ultra-low short-term market rate environment, while maintaining their conservative investment strategy, fund managers have demonstrated a growing appetite for longer-dated assets issued by highly-rated quasi-sovereigns, and to a lesser extent, sovereigns and corporate issuers. The extension of average portfolio maturity has nevertheless been limited in 2012 so far, as MMFs’ liquidity has remained around the high levels observed since mid-2011, with average daily liquidity relatively stable at about 30% of portfolios.

The average portfolio allocation to quasi-sovereigns reached 10% at end-October, versus less than 2% before August 2011, the most largely held entities being Erste Abwicklungsanstalt (EAA) aka First Winding-up Agency and FMS Wertmanagement, KfW Bankengruppe, CDC, CADES, ACOSS, the European Investment Bank (EIB) and the European Financial Stability Facility (EFSF)/European Stability Mechanism (ESM).

Fitch also notes MMFs’ increased appetite for collateralised exposures, which has materialised so far almost exclusively through repurchase agreements and asset-backed commercial papers (ABCPs). Covered bonds with below one year residual maturities and some form of collateralised commercial papers (e.g. repo-backed) are among the possibilities that are the most widely contemplated by MMFs.

However, this strong demand for highly-rated sovereigns, quasi-sovereigns, corporates and collateralised assets is still far from being satisfied given the limited short-term market supply, notably in euro and sterling. As such, MMFs still retain a large exposure to the banking sector (77%), albeit slightly reduced from a year before (82%). In this context, MMFs could prove natural buyers of so-called short-term eurobonds (or euro treasury bills), should they be issued one day.


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