(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
according to Fitch Ratings.
Fitch believes that as the market expands over the next year,
if spreads widen, money fund demand for these securities will
addition, if the FRNs replace some issuance of T-bills as
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
bid-to-cover ratio at 5.67 times higher than the typical ratio
auctions. 21 US money funds sponsored by 10 different managers
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
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
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
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
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
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
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
Additional information, including on Fitch's rating criteria for
funds, is available at www.fitchratings.com.
Fund & Asset Management
+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,
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.
expressed are those of Fitch Ratings.
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