Nov 26 - Fitch Ratings says in its newly-published sector update that European MMFs are
reallocating their portfolios towards longer-dated assets issued by highly-rated supranationals,
government agencies, sovereigns and corporates, while maintaining high overnight liquidity, amid
sharply declining yields. However, MMFs' strong demand for such assets is still far from being
satisfied given limited short-term market supply.
To preserve MMFs' yield in the current ultra-low short-term market rate environment, while
maintaining their conservative investment strategy, fund managers have demonstrated a growing
appetite for longer-dated assets issued by highly-rated quasi-sovereigns, and to a lesser
extent, sovereigns and corporate issuers. The extension of average portfolio maturity has
nevertheless been limited in 2012 so far, as MMFs' liquidity has remained around the high levels
observed since mid-2011, with average daily liquidity relatively stable at about 30% of
The average portfolio allocation to quasi-sovereigns reached 10% at end-October, versus less
than 2% before August 2011, the most largely held entities being Erste Abwicklungsanstalt
, FMS Wertmanagement, KfW, CDC, CADES, ACOSS
, the European Investment Bank and the European Financial Stability Facility
/ European Stability Mechanism. Fitch also notes MMFs' increased appetite for
collateralised exposures, which has materialised so far almost exclusively through repurchase
agreements and ABCPs. Covered bonds with below one year residual maturities and some form of
collateralised commercial papers (e.g. repo-backed) are among the possibilities that are the
most widely contemplated by MMFs.
However, this strong demand for highly-rated sovereigns, quasi-sovereigns, corporates and
collateralised assets is still far from being satisfied given the limited short-term market
supply, notably in euro and sterling. As such, MMFs still retain a large exposure to the banking
sector (77%), albeit slightly reduced from a year before (82%). In this context, MMFs could
prove natural buyers of so-called short-term Eurobonds (or euro Treasury-Bills), should they be
issued one day.
Other topics covered in the report include: MMFs geographical reallocations, low yields,
regulatory developments and Fitch's cash investor survey.
Fitch's analysis is based on European MMFs rated by the agency, which represented EUR323bn
at end-October 2012. Total European MMFs' assets under management (AUM) stood at EUR1.08trn at
the same date.
The full report, entitled "European Money Market Funds - Sector Update", is available at
www.fitchratings.com. It provides market participants with an update on recent market
developments, summarises key industry data and comments on European MMFs investment trends. It
is part of a suite of sector update reports in the fund space.
Link to Fitch Ratings' Report: European Money Market Funds - Sector Update