Fitch: Money Funds Cautious on Treasury Floating Rate Notes

Wed Feb 19, 2014 10:05am EST

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(The following statement was released by the rating agency) NEW YORK, February 19 (Fitch) The US Treasury's first issuance of a floating rate notes (FRN) failed to attract significant participation from money market funds due to concerns over the US debt ceiling deadline, a low spread and a desire among fund managers to observe how liquidity for the program develops, according to Fitch Ratings. Fitch believes that as the market expands over the next year, and particularly if spreads widen, money fund demand for these securities will increase. In addition, if the FRNs replace some issuance of T-bills as currently expected, money funds are likely to increase allocations to the FRNs. Treasury FRNs held by taxable money funds at the end of January make up only 0.07% of the funds' assets. Crane Data, LLC data shows that as of the end of January money funds held $1.7 billion, or 11.2%, of the $15 billion of first issuance. However, demand from other investors was very strong with the bid-to-cover ratio at 5.67 times higher than the typical ratio for Treasury auctions. 21 US money funds sponsored by 10 different managers participated in the first auction of the FRNs. While the average allocation to Treasury FRNs for these funds was 1.1%, it ranged from a low of 0.3% to a high of 4.0%, indicating varying attitudes even among participants. Fitch learned via discussions with fund sponsors that managers are not in a rush to buy Treasury FRNs, and would instead like to see how the market develops, particularly with regards to liquidity. The 4.5 basis point spread over the three-month T-bill set at the first FRN auction was low compared to initial expectations and further reduced money funds' urgency to buy. Managers were also concerned about potential disruptions that a protracted Congressional fight in February concerning raising the U.S. debt ceiling would cause to the Treasury market. A resolution was reached on Feb. 11. An important consideration for buying Treasury FRNs is the effect of these securities on a fund's weighted average life (WAL), as money fund portfolios are limited to a WAL of 120 days. The two-year maturity of the FRNs is consistent with Fitch's eligibility criteria for rated money funds, but will constrain the amount of the security that any fund can buy. For example, the money fund with the largest allocation to the FRNs, at 4.0% of the portfolio, saw its WAL increase significantly, from 50 to 78 days between December 2013 and January 2014. Although a few of the funds sold other securities with long maturities to make room for the FRNs, the WAL of most of the funds increased modestly. Additional information, including on Fitch's rating criteria for money market funds, is available at www.fitchratings.com. Contact: Greg Fayvilevich Director Fund & Asset Management +1-212-908-9151 Kellie Geressy-Nilsen Senior Director Fitch Wire +1 212 908-9123 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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