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July 23 (The following statement was released by the rating agency)
Fitch Ratings says that European-domiciled money market funds (MMFs) adjusted their allocation to repurchase agreement (repo) counterparties in 2Q14, amid contrasting trends in repo exposures. They also maintained high but reduced overnight liquidity and continued to lengthen portfolio maturities.
Declining euro market rates following the early-June ECB rate cut have partly been reflected on euro MMFs yields, which fell to an average of 8bp in mid-June and have stabilised around that level since then. This is 17bp above the seven-day euro LIBID, which moved negative to -8bp at end-June, back to the low levels seen during 2H12 and 1H13, as MMFs took advantage of a steep curve across maturity segments up to one year through extended portfolio weighted average lives. In contrast, sterling and US dollar MMF yields were stable through the quarter at 35bp and 4bp on average, marginally above the seven-day LIBID.
Allocation to repos, which in MMFs are overnight investments, reduced in euro MMFs over the quarter in response to declining euro short-term yields but increased in sterling and US dollar MMFs. Meanwhile, there has been a reallocation between repo counterparties over the quarter from BNP Paribas and, to a lesser extent, HSBC and JPMorgan, into Barclays and Deutsche Bank. French issuers have been reduced in euro and US dollar MMFs, partly as a result of this reduced secured exposure to BNP Paribas as repo counterparty.
Overnight and one-week portfolio liquidity levels moved lower this quarter but remain high at 27% and 38% on average. This change was driven by developments in euro and US dollar funds, primarily in June, as a result of investments in longer dated assets and quarter end seasonal outflows.
European MMF assets stood at EUR927bn at end-June. In 2Q14, constant net asset value (CNAV) funds' assets grew by 5%, relatively well spread across funds in euro, sterling and US dollar. Variable net asset value (VNAV) funds domiciled in France, the second-largest MMF segment in Europe, saw their assets contract by 4% over the quarter. This was a result of a combination of seasonal quarter-end investors' flows and reallocation towards more yielding investments by French MMF investors, who tend to reallocate in non-MMFs products when less risk averse more aggressively than CNAV investors.
At the individual fund level, investors' flows were relatively contained and well managed across the funds rated by Fitch. The maximum average weekly outflows observed at the individual fund level over the period of a month was 10% of a fund's assets (in April). This was comfortably met by high portfolio liquidity.
The full report, "European MMF Quarterly - 2Q14" is available at www.fitchratings.com or by clicking the link below.
Link to Fitch Ratings' Report: European MMF Quarterly - 2Q14