04 February 2014

Fitch: European USD and GBP MMFs increase unsecured financial exposures

Fitch Ratings' 4Q13 reports on Europe-domiciled MMFs show that US dollar- and sterling-denominated funds in their search for yield have increased their unsecured financial exposures. The move was at the expense of repurchase agreements and sovereigns or quasi-sovereigns issuers.

In contrast euro funds have favoured some re-allocation towards sovereigns, supranationals and agencies, and non-financial corporates. As of December 2013 US dollar funds have seen their unsecured exposure to financial issuers rise to 71% of average portfolio assets, up from 57% a year ago. A similar shift was witnessed in sterling MMFs, albeit to a lesser extent, with unsecured financial exposures growing to 82% from 75%. Euro-denominated funds, on the other hand, have reduced their unsecured exposure to financials to 64% from 67%.

Diversification towards Canada increased during 4Q13 in MMFs across all three major currency funds, driven by available supply and relative yields. Bank of Nova Scotia, Bank of Montreal, the Toronto-Dominion Bank and the Royal Bank of Canada were the primary beneficiaries of the increased allocation.

A marked increase in allocation to some Asian issuers has also been observed, notably Singapore's Oversea-Chinese Banking Corp. Meanwhile, three large Japanese banks - Sumitomo Mitsui Banking Corp., Mitsubishi UFJ Financial Group and Mizuho Bank, - have consolidated their position as important issuers for MMFs. More generally, country diversification has increased, due to the search for yield and high-quality issuers, while US and UK exposures saw the biggest reductions.

The report also notes that assets of European MMFs declined in 2013 and in 4Q13, with the exception of constant net asset value MMFs denominated in US dollar which witnessed a modest rise in assets during 4Q13.

Portfolio average maturities have been fairly stable on average over the quarter across US dollar and sterling Fitch-rated MMFs. Euro MMFs' maturities have markedly shortened in December, in anticipation of seasonal year-end outflows. Portfolio liquidity was kept high with overnight liquidity close to 30% on average.

Full press release

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