Fitch: European MMFs are Shifting Exposures

Faced with declining short-term issuance by banks, European money market funds (MMFs) are adjusting their issuer selection and sector allocation, Fitch Ratings said in its latest quarterly publication on European MMFs. Low market yields are adding to the pressure on euro-denominated funds.

European MMFs have been actively adjusting their exposures among bank issuers since the beginning of the year, primarily as a function of available supply. The resulting fluctuation in individual bank positions contrasts with MMFs’ typically more stable investment approach. Funds have also found investment opportunities outside of the financial sector, in the corporate segment for euro and, to a lesser extent, sterling funds, and in government agencies for US dollar funds.

Procter and Gamble made a notable breakthrough and became the largest unsecured issuer exposure across euro funds at the end of March 2015. It is unusual to see a corporate among the top issuers represented in MMF portfolios. Collectively, corporate issuers continue to grow in euro funds, now at 14% on average, more than twice their level a year ago.

Across all Fitch-rated European MMFs, unsecured financial exposures moved to new historical lows, reaching 65% at end-March 2015, as result of reduced supply of short-term bank securities combined with funds’ search for yield.

Fitch plans to review by end-2Q15 the ratings of banks that are on negative outlook due to the agency’s view of declining state support. As a result, their long-term IDRs are likely to be based on their viability ratings. Of these banks, MMFs are primarily exposed to ING Bank, Deutsche Bank, ABN Amro Bank, Lloyds, Societe Generale and Bank of America. The viability ratings are currently ‘a’ for the first three banks, and ‘a-‘ for Lloyds, Societe Generale and Bank of America.

Euro MMFs’ yields have continued to decline and some funds started to pass on negative yields to investors. This is likely to continue and become more widespread as the European Central Bank’s quantitative easing programme will likely keep euro short-term yields very low for a prolonged period. In contrast, sterling and US dollar-denominated MMFs have had a modest yield uptick.

Portfolio liquidity remained high over 1Q15, including in euro funds, ending the quarter at the same levels as they started, at 25% and 36% on average for overnight and weekly liquidity, respectively. Maintaining high portfolio liquidity is particularly sensitive for euro funds as their declining yields may trigger large and sudden outflows.

Constant net asset value funds attracted new assets in 1Q15, including in euro, reaching EUR581bn in total assets under management. Asset flows have nonetheless been more volatile at fund level over the past six months and proved particularly pronounced in April for the first funds that turned negative. These funds were nonetheless able to withstand redemptions. Should a sudden, sharp acceleration in redemptions put pressure on portfolio liquidity, this could be rating negative. Total European MMF assets were at EUR952bn at end-2014.

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