Wednesday, December 21, 2011

Recent trends in US money market funds

Today we got the highly anticipated Fitch report on US money market funds. There are two key items in the report worth discussing:

1. European bank exposure continues to decrease (which is not surprising) but there is also quite a bit of rotation going on.
Fitch: MMF exposure to French banks, which declined by 63% over the past month, was partially offset by increases in exposure to Dutch, Swiss, U.K., and Nordic banks. European bank exposure currently represents 33.4% of total holdings of $645 billion within Fitch’s sample of the 10 largest MMFs, a decrease from 34.9% of fund assets at the end of October. The current exposure level is the lowest in percentage terms for European banks, which was as high as 51.5% as of month-end May 2011
Funds rotated significantly out of France into Canada and somewhat into Japan. Exposure to French banks is now only 3%.

2. The biggest development in US money markets continues to be a shift from unsecured commercial paper and into collateralized instruments, namely repo (as is the case with eurozone banks lending to each other.) The next chart shows the increase in usage of secured lending.

This trend will certainly keep US money market funds from major redemptions as we saw in 2008 (particularly with the Reserve fund), but as the earlier post shows, Eurepo rates have collapsed.  Lack of product that meets the strict new criteria and near zero rates makes the money markets business  unprofitable - it's difficult to charge fees on something that earns close to zero. Money markets funds will continue to be an "asset gathering" mechanism used to lure investors into more profitable asset classes.
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