| NEW YORK
NEW YORK U.S. prime money market funds trimmed euro zone bank debt holdings in May on worries over Spain's problem banks and Greece's possible exit from the euro zone, which could deepen the region's debt crisis, a report from JPMorgan Securities released on Tuesday showed.
Meanwhile, money funds' appetite for the short-term debt of investment banks was dampened on fears of ratings downgrades by Moody's Investors Service.
Moody's earlier this year said it might cut the credit ratings of many large global banks and securities firms, including major U.S. and European institutions, due to fragile funding conditions.
Prime money market funds lowered their euro zone debt holdings by $7 billion in May, following a $14 billion increase in April.
May's decrease reduced their total exposure to euro zone banks to $199 billion, although it is still up $45 billion since the beginning of the year, according to J.P. Morgan's latest monthly analysis of prime money funds' holdings.
"Despite the concerns brewing in Europe, prime MMFs (money market funds) have not seen large outflows like those they experienced last year as prime MMFs are much less exposed to euro zone banks this time around," JPMorgan analysts wrote.
Unlike Treasuries-only money market funds, prime money funds may invest in riskier short-term bank debt in an attempt to obtain higher yields.
Total prime money funds had $1.41 trillion in assets at the end of May, down $4 billion from April and down $21 billion since the beginning of the year, JPMorgan said. They represented a little more than half of all U.S. money fund assets.
The Netherlands accounted for a large share of the fall in euro zone holdings, as funds cut their Dutch exposure by $5 billion. There were $1 billion falls in their overall exposure to Germany and France last month, JPMorgan analysts said.
As they moved cash out of Europe, prime fund managers stashed the proceeds into perceived safe-haven Canadian, Japanese and U.S. debt, according to the latest analysis.
Their non-European holdings grew $23 billion to $569 billion in May. For the year, they are up $12 billion.
RATINGS REVIEW DECISION
While the euro zone's financial woes have underpinned money funds' preference for low-risk, low-yielding debt, Moody's review of Goldman Sachs, Morgan Stanley and other global investment banks has intensified the risk aversion among fund managers, JPMorgan analysts said.
Traders expect Moody's will announce its decisions on these financial institutions this week as a part of a broad credit review of West European and major global banks.
Global investment banks rely on money funds for short-term loans to finance their trades and daily operations. Funds buy their commercial paper, certificates of deposits, repurchase agreements (repos) and other short-term debt.
The banks borrowed a combined $510 billion from prime funds from repos alone at the end of May, JPMorgan analysts said.
"The larger concern for prime MMFs currently is the ongoing Moody's bank ratings review, particularly those of firms with global capital market operations (GCMIs)," they wrote.
Steep downgrades of GCMIs would hurt the market value on their debt and could force funds to rid of them.
In anticipation of downgrades, prime money funds reduced their repos in which GCMIs pledge non-government securities as collateral by $45 billion in May. In turn, they increased their repos backed by U.S. government and agency securities - which are seen safer - by $68 billion, JPMorgan analysts said.
"The downgrades so far have been less severe than market participants initially thought and this has recently given hope that the downgrades to GCMIs will be less severe than originally anticipated as well," they wrote.
(Editing by Andrea Ricci)