August 10, 2011 / 11:00 PM / 8 years ago

Top U.S. money funds stood by French banks in July

* JPMorgan, Fidelity, Federated hold bank securities-filings

* Fidelity: French banks are “quality”

* A boost for the pressured banking sector?

By Ross Kerber

BOSTON, Aug 10 (Reuters) - Major U.S. money market mutual funds continued to hold securities issued by top French banks in July, new data show, underscoring the close ties between the funds and the latest part of the financial system under stress.

The data comes at a time of increased nervousness on the outlook for French banks over their exposure to other European economies. On Wednesday shares in Societe Generale (SOGN.PA) fell 15 percent, while rivals Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA) closed down 12 percent and 9.5 percent respectively.

The latest details on the holdings of U.S. money funds, which have $2.5 trillion in assets, could rile domestic markets if institutional investors decide the big money funds are too exposed to the French banks.

On the other hand, money funds have largely defended their French bank holdings since questions about them began this summer. The fact that they stood by the banks through July, despite major outflows from the funds’ own investors during the period, might lend support to arguments that the French banks are sound now.

Holdings are closely watched because money funds support so much of the global financial system. A pullback by the funds could in theory lead to a loss of liquidity for the French banks or other lenders.

NOT “HUNGRY FOR DOLLARS”

So far no major pullback seems to be under way, said Alex Roever, head of short term fixed income strategy at JPMorgan Chase & Co (JPM.N), in an interview.

“I think the perception that money funds are trying to liquidate their foreign bank commercial paper positions is not quite right,” he said. He added that “This story of the banks being ‘hungry for dollars’ is overdone.”

Roever did find in a recent report that across the Eurozone, U.S. prime money funds cut their holdings of commercial paper by 10 percent in July to $340 billion. But some categories increased — the funds added $11 billion worth of French bank repurchase agreements, or repos, likely reflecting investors desire for shorter maturities.

A review by Lipper, a Thomson Reuters unit, found JPMorgan’s $117 billion Prime Money Market Fund had 11 percent of its portfolio invested in the three banks at the end of July, up from 9 percent at the end of June.

Lipper also found another big fund, Federated Investors’ (FII.N) $47 billion Prime Obligations Fund, had 16 percent of its assets invested in instruments from the three French banks at the end of July, up from 15 percent at the end of June.

“We are definitely supportive of the view that the French banks ... continue to meet our assessment of high quality and represent minimal credit risk,” said Deborah Cunningham, Federated Chief Investment Officer, via email.

She said the company has not changed its positioning since the end of July.

BOOSTING HOLDINGS

Also, Fidelity Cash Reserves — the industry’s largest fund with $118 billion in assets at July 31 — raised its holdings in the three French banks to 9 percent of its assets at the end of July from 8 percent at the end of June.

Adam Banker, a Fidelity spokesman, said via e-mail that “The French banks in which Fidelity money market mutual funds invest are among the strongest financial institutions in the world. They are well-capitalized, have strong local deposit bases, have significant liquidity buffers and represent minimal credit risk. Over the past year, these French banks have served as a flight to quality for investors.”

INFLOWS RETURN

In addition to the European issues, money funds have faced stress this summer because of the possibility of a U.S. default before a debt deal was struck in Washington last week. Amid high outflows, money funds boosted their liquidity and shortened maturities on their holdings to reassure investors.

Flows have since returned to normal — money fund assets rose $61.3 billion in the week ended Aug. 9, tracking firm iMoneyNet.com said on Wednesday.

Nathan Flanders, a Fitch Ratings analyst who follows money funds, said fund managers may have gotten more skeptical of the French banks and are shortening the maturities they hold.

In any case, even though the money funds navigated the debt-ceiling debate and Friday’s downgrade of U.S. Treasuries by Standard & Poor’s, Flanders said he doubts the funds will let their weighted average maturities creep up quickly now.

“I don’t think the money fund managers are sounding the all-clear,” he said. (Reporting by Ross Kerber; Editing by Phil Berlowitz)

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