Fitch: More Extreme Maturities for Banks in European MMFs
OREANDA-NEWS. Fitch Ratings says that European money market funds (MMFs) are implementing more "barbelled" investment strategies, investing more heavily at the two extremes of their asset maturity spectrum. This is particularly pronounced for their investments in financials. In its latest quarterly report on European MMFs, Fitch also highlights that investors flows are getting more volatile and disparate, raising the bar for portfolio liquidity management.
European MMF exposure to banks has been shifting towards larger allocation to assets longer than 90 days. This has been a continued trend since 2013 in euro and sterling funds as banks lengthen their funding, encouraged by Basel III requirements, and MMFs try to eke out incremental yield in longer dated securities. More recently and in contrast to prior trends, short-dated bank exposures (below seven days) also increased, as funds were able to obtain short deposit and repo outside of their usual bank counterparties.
The stability of average weekly net fund's outflows, as a percentage of individual MMF assets, hides increasing volatility and disparity since April last year. Outflows exceeded 20% of a fund's assets in four instances in 1Q16, with a maximum one week outflow from one fund of 43% in February. Funds have been able to meet these redemption requests, including the fund that experienced these largest weekly outflows, without distortion of their risk profile.
This was supported by high and expanding weekly portfolio liquidity, which reached an average of 42.6% at end-March, which is seven percentage points higher than a year before. Large outflows may nonetheless at times distort a fund's risk profile. Fitch is therefore monitoring rated funds to ensure potential outflow-driven passive criteria guideline breaches are only temporary and minor. Material, sustained breaches will lead to downgrades.
European CNAV assets consolidated to EUR525.4bn 1Q16, close to their September 2015 level, after they had reached a peak at the end of 2015. Most of the variation over the past six months was driven by changing allocation in USD-denominated European funds as investors' adjusted allocation in the context of the December US Fed rate hike and their expectations of future rate changes. Euro CNAV assets remained virtually stable at around EUR70bn this quarter despite their continued declining yields.