OREANDA-NEWS. Fitch Ratings says money fund managers' active management of credit, market and liquidity risks underpins its stable outlook for the sector. However, the sector faces several headwinds, including low or negative yields, constrained investment supply, and the impact of regulatory reform globally.

Fund managers in the US are repositioning cash management offerings ahead of the implementation of money fund reform. Fitch expects alternative liquidity products to grow as well as a shift to government assets, as investors reassess floating NAV US prime money funds. ,. In Europe, discussions on money fund regulation continue, although the final form and timing are not settled.

Fitch expects further consolidation of money funds and asset managers active in that space in 2016 driven by the cost of reform implementation and sustained low yields. The low yield environment is particularly acute for euro money funds, even as investors are beginning to accept negative euro money funds yields due to the lack of alternatives.

Market participants expect interest rate paths divergence in the US/UK versus the eurozone. Money funds will shorten their duration in anticipation of their expectations of the Federal Reserve and the Bank of England to start raising rates in late 2015 and 2016, respectively. The European Central Bank continues to ease monetary policy, forcing euro funds to contend with negative yields.

Credit quality for the banking sector is stabilising as Fitch has completed its review of sovereign support assumptions in most European, Swiss, US and Canadian bank ratings to reflect newly-adopted bank resolution regimes. Banks will remain an important segment of eligible issuers for money funds, albeit declining in portfolios' allocation as Basel III rules discourage banks from obtaining short-term funding.

Fitch believes money funds will pursue further reallocation towards securities issued by sovereigns, supranationals and government agencies (SSA), non-financial corporates or, in the case of large US money funds, the Fed's reverse repo programme. The expected flows into government money funds in the US will pose a challenge as the available supply and yields on government assets remain low.

The USD4.6trn of global money fund assets predominantly reside in the US and Europe; however, money fund products are growing in other markets, most notably in China, which now comprises 8.5% of global money fund assets.