Fitch: Declining Short-Term Bank Supply Challenges European Money Funds
OREANDA-NEWS. Fitch Ratings says that the material decline in short-term supply from banks is challenging portfolio liquidity management for European money funds. They rely more on highly-rated and liquid sovereign, supranationals and agencies (SSAs) to maintain robust portfolio liquidity, especially at times of most pronounced banks' retreat, as was the case at end-2015. In its latest quarterly report on European MMFs, Fitch also highlights that more active corporate issuance is flowing into euro MMFs.
The average European MMF allocation to SSA stood above 16% at end-2015 with notable increase in UK Gilt, US Treasuries, and Danish, Belgium, French and Dutch government or agency securities for the sterling, US dollar and euro funds, respectively. The shrinking short-term bank supply is a consequence of the banking regulations and their liquidity requirements, which are discouraging banks from taking on short-term deposits and repo. The phenomenon is particularly acute at year-end and, since 2015, also at quarter-end, when banks report their liquidity coverage ratios.
The resulting sector reallocations in European money funds are most pronounced in euro funds, where the share of financials declined in 4Q15 for the seventh consecutive quarter, while non-financial corporates reached an historical high of 17% at end-2015, compared with less than 10% two years ago. This was fuelled by more active high-quality corporate issuance, as many corporates take advantage of historically low rates in euros to shore up debt financing. It includes US corporates, which confirmed their interest for issuing in euro amid diverging rate paths between the US and Europe. Procter and Gamble is now the largest unsecured average exposure across euro funds we rate, an unusual situation for money funds that are typically more exposed to financial issuers.
At end-2015, the financial allocation in euro MMFs had fallen to 59% from 67% a year before, although it remains the largest sector in euro money funds.
Inflows into US dollar and sterling-denominated CNAV MMFs in 4Q15 pushed assets in the overall European CNAV MMF segment to EUR580.7bn at end-2015 (up 13% yoy), after having reached its historical high of EUR585.2bn in November. This highlights a sustained demand for liquidity products as cash remains high on corporate treasurers' balance sheets. Euro CNAV assets stabilised at EUR70bn this quarter, slightly lower than at end-3Q15, but were down by more than 18% in 2015 due to large outflows in 2Q15 after funds' yield turned negative in April.
Euro and US dollar-denominated European MMFs saw their yields markedly diverge following December's decisions by the ECB and the Fed to change their policy rates. The average euro MMF gross yield was negative 0.13% at end-January, a 6bp decline from the previous quarter, less than the euro LIBID change. The ECB deposit facility rate was cut by 10bp to minus 0.30% on 9 December. In contrast, yields on US dollar funds increased to 0.49%, representing an increase of 23bp over the quarter, as the Fed funds rate was raised by 25bp to 0.50% after almost a decade of stalled US policy rates.