(The following statement was released by the rating agency)
Sept 24 - Low interest rates are proving particularly troublesome for managers of euro-denominated money market funds (EUR MMFs), says a report published by Standard & Poor’s Ratings Services titled “Interest Rate Uncertainty Clouds Future Performance Of ‘AAAm’ Euro Money Market Funds.” Although the funds that we rate are achieving modest performance, a contracting pool of suitable, high quality issuers is limiting managers’ choice of securities, and future achievements depend on whether interest rates move lower. As a consequence, EUR MMFs continue to post lower net yields and declining total assets.
“Although the European Central Bank kept interest rates unchanged on Sept. 6, the situation has become especially acute since its last rate cut on July 6,” said Standard & Poor’s credit analyst Emelyne Uchiyama. “What’s more, we believe net yields for ‘AAAm’ rated EUR MMFs could still move lower due to legacy securities that deliver higher yields than would be the case if they were purchased today.”
“While EUR MMFs are faring modestly at present, the funds have limited options if yields fall lower,” added Ms Uchiyama. “We believe another interest rate cut by the ECB could derail the future performance of ‘AAAm’ funds and that of the entire short-term money market industry.”
With returns on short-term money market instruments trending lower and the supply of suitable issuers with high credit quality declining, fund sponsor groups will have limited options in the event of lower interest rates. Since the beginning of the year, ‘AAAm’ Euro Government Liquidity funds (invested primarily in sovereign securities) have faced the brunt of the harsh investing conditions, while a number of ‘AAAm’ prime euro liquidity (Euro Prime) funds that have remained open to new investors have shown moderate asset inflows. Euro Prime funds are invested in a wider range of high credit quality assets.
In dealing with this low-yielding environment, some fund groups have soft-closed their funds to new investors, increased the fund’s weighted average maturity, and diversified into non-European securities such as those in Asia-Pacific and the Middle East, albeit with shorter maturities. Yet, despite the difficulty in maintaining a positive yield, our ‘AAAm’ funds are still being managed within our ratings criteria.
Based on our weekly surveillance data up to Aug. 31, 2012, net assets for ‘AAAm’ EUR MMFs dropped by 1.0% to EUR131.7 billion in July, and by 5.6% to EUR124.3 billion in August. Since Dec. 31, 2011, net assets for these funds have dropped 13.9%, while offshore ‘AAAm’ U.S. dollar funds have dipped by 2.5%. In the same period, net assets for British pound sterling-denominated ‘AAAm’ funds have increased by 9.7%.