Caution prevails among US money market managers

LONDON, Sept 28 (IFR) - US prime money market funds (MMFs) moderately increased their exposure to eurozone banks in the month of August but remain cautious towards them, Fitch said in a published report on Friday.

In the past two months appetite for European credit across the debt capital markets has recovered slightly following the unveiling of the European Central Bank's plans to buy unlimited sovereign bonds.

Highlighting this trend, MMFs increased their exposure to eurozone banks to 9.2% from 8.5% in the previous reporting period in July.

"Spanish and Italian banks have pretty much abandoned the money market space in the past 12 months which has led to a massive drop-off in short-term wholesale funding," said a commercial paper trader.

"The slight uptick we have seen in recent months is predominantly related to French issuance as other eurozone banks have not been very reliable in recent months."

Prime money market funds invest in short-term securities (less than 12 months) that are used to earn interest for shareholders while maintaining a net asset value of USD1 per share.

RISK AVERSION

Since May 2011, MMF exposure to the eurozone has fallen by 74% on a dollar basis. This coincided with heightened caution by both European banks and their regulators on the use of this potentially volatile form of funding.

When short-term money market funds are investing in eurozone banks they are showing a preference towards secured funding with 39% of MMF allocations coming in the form of repos, the highest level since Fitch began analysing the market in 2006.

"US investors have a preference for secured exposure in the form of repurchase agreements which suggests that MMFs are somewhat cautious towards banks in the region," Fitch said.

Meanwhile, the US, UK, and Japan benefited from the risk aversion as MMFs increased their allocations by 130% to Japanese banks on a dollar basis since May 2011.

Bank of Tokyo Mitsubishi was the biggest benefactor of the trend as MMFs have the highest exposure (4.1%) to the Japanese borrower.

"Banks like Mizuho and BTMU are benefiting from the fact that they are very liquid and highly rated," a CP trader said.

Other banks like Barclays and JP Morgan Chase benefited from their non-European flavour and were ranked second and third in terms of MMF allocations.

Closer to home, repos collateralised by Treasuries and agencies in the US also reaped the benefits of investor risk aversion to Europe as MMFs increased their exposure from 20% at the end of May 2011 to over a third.

Fitch compiled the data based on a sample of 10 of the largest US prime MMFs with a total exposure of USD645bn as of August 2012, representing 45% of the USD1.43tn in total US prime MMF assets.

Deutsche Bank remains the only eurozone institution within the top 15 largest MMF exposures, compared to three eurozone institutions in the top 15 at end-May 2012 and seven at end-May 2011.

Collectively, Australian, Canadian, and Japanese banks represent nine of the top 15 names. Westpac is the only new entrant in the top 15.

"We are seeing a greater geographic diversification on the part of money market fund managers who are looking more and more to Japan, Canada, as well as Treasuries and agencies in the US," said Robert Grossman, macro credit research at Fitch.