Fitch: Banks Retreat from Commercial Paper Ahead of Money Fund Reform
Massive asset flows in money market funds over the last few months have favored government debt issuers at the expense of short-term debt issued by banks and other non-government entities. Investors and fund managers have shifted $860 billion in assets out of prime funds and $867 billion into government money funds between late October 2015 and September 23, according to iMoneyNet data. In addition, prime money fund managers have significantly shortened the maturities of the remaining prime money fund portfolios, anticipating additional outflows in the weeks ahead, and therefore reducing demand for longer-dated CP.
"Looming reforms to prime money market funds have reduced the funds' demand for U. S. CP and in turn pushed up borrowing rates," said Greg Fayvilevich, senior director, Fitch Ratings.
Rates on CP maturing in 90 days rose from 0.60% at end-April to 0.85% as of September 23. Higher rates are causing CP issuers to re-evaluate their need for the funding, and seek other investors such as short-term bond funds.
Some CP issuers, such as certain foreign banks without a natural deposit base in USD, may be affected more by the changing dynamics in the money markets. As Fitch highlighted in a previous report, "Foreign Banks Lose Money Fund Financing as Reform Looms", some short-term debt issuers are shifting their funding profiles to rely more on the growing government money funds, and less on prime money funds.