* Money market rates seen ultra-low but positive
* Investors extending maturity as overnight rate sinks
* Caution remains over ECB liquidity measures
By Emelia Sithole-Matarise
LONDON, June 15 The European Central Bank's
decision to cut its deposit rate below zero is unlikely to cause
a stampede out of euro zone money market funds, with some
investors expecting yields to stay positive in the near term.
Many in the market had been concerned that the unprecedented
rate cuts would squeeze short-term interest rates to zero or
below. That could wipe out already dwindling returns for money
market funds - an important source of short-term funding for
banks, companies and investors.
The funds had been warming to the euro zone as its sovereign
debt crisis eased and banks started borrowing more from the
market. U.S. money market funds hold euro zone assets of 350
But investors were mindful of events in 2012, when the ECB
cut its overnight deposit rate to zero percent, driving
short-term interest rates into negative territory.
Many say the situation is different this time. Market moves
in 2012 were exacerbated by a worsening debt crisis that has
While the amount of surplus cash in the banking system is
set to rise later in the year when the ECB starts pumping out
its new four-year loans, it will still be way below the peaks
hit in 2012 of around 800 billion euros.
Banks are repaying crisis loans and there are doubts as to
how much appetite banks will have for the new conditional loans,
especially as they still face stringent stress tests before the
end of the year.
Even though the overnight bank-to-bank Eonia rate has fallen
to an all-time low of 0.04 percent and may turn negative in the
near term as excess liquidity rises, many in the market expect
short-term rates, particularly in maturities over one month, to
"We still think that money market rates will stay positive
but at low levels. The ECB also made strong suggestions that for
all practical purposes we are at the lower bound for rates. The
market has certainly taken notice of that," said Jim Fuell,
European head of Global Liquidity at JPMorgan.
"At this time, we don't expect the yield on JPMorgan Money
Market Fund to turn negative in the near term and all of our
euro funds remain open to business as normal. We will continue
to monitor market conditions closely."
According to Fitch Ratings, the risk that money market fund
yields will turn negative was lower than it was 18 months ago at
the height of the euro zone debt crisis, which saw a flight to
quality to top-rated securities from the periphery.
Many of these funds had been preparing over the past year
for the ECB's move and some have been extending maturity or
moving down the credit quality spectrum.
"MMFs are likely to continue to look for yield-picking
investment opportunities with longer-dated assets, taking
advantage of the steeper yield curves since end-2013," Fitch
Ratings said in a recent note.
It noted that they had increased their allocation to assets
with maturity of more than three months during the first six
months of the year. The move was most pronounced in May, because
most funds anticipated the ECB rate cut and their portfolios'
average maturity now extended to 58 days on average at the end
of last month, 10 days longer than at the beginning of the year.
Deborah Cunningham, chief investment officer of
Pittsburgh-based Federated Investors' money markets, said the
firm's euro fund had an average maturity of 57 days, 13 days
longer than its U.S. dollar fund.
She also said an improvement in the credit ratings of
peripheral euro zone issuers who were all but shut out of the
market two years ago was also offering investors more choice of
short-term debt to invest in.
For Andrew Wilson, chief executive officer for EMEA at
Goldman Sachs Asset Management, what happens to money market
rates will depend on the effectiveness of the ECB's new
long-term cheap loans and its decision to suspend the
sterilisation of sovereign bonds it bought at the height of the
"We expect to see a bit of that money move further out along
the curve, but it will depend on how effective those other
(Editing by Larry King)