European MMFs show strong demand for longer-dated assets, Fitch
European money market funds are reallocating their portfolios towards longer-dated assets issued by highly-rated supranationals, government agencies, sovereigns and corporates, while maintaining high overnight liquidity, amid sharply declining yields, Fitch Ratings said in a report published today.
However, the agency found, MMFs’ strong demand for such assets is still far from being satisfied given limited short-term market supply.
“To preserve MMFs’ yield in the current ultra-low short-term market rate environment, while maintaining their conservative investment strategy, fund managers have demonstrated a growing appetite for longer-dated assets issued by highly-rated quasi-sovereigns, and to a lesser extent, sovereigns and corporate issuers,” Fitch said.
The extension of average portfolio maturity has been limited in 2012, as MMFs’ liquidity has remained around the high levels observed since mid-2011, with average daily liquidity relatively stable at about 30% of portfolios.
The average portfolio allocation to quasi-sovereigns reached 10% at end-October, versus less than 2% before August 2011.
Fitch also noted MMFs’ increased appetite for collateralised exposures.
Covered bonds with below one year residual maturities and some form of collateralised commercial papers (repo-backed) are among the possibilities that are the most widely contemplated by MMFs.
However, this strong demand for highly-rated sovereigns, quasi-sovereigns, corporates and collateralised assets is still far from being satisfied given the limited short-term market supply, notably in euro and sterling, the report found.
As such, MMFs still retain a large exposure to the banking sector (77%), even if slightly reduced from a year before (82%).
“In this context, MMFs could prove natural buyers of so-called short-term Eurobonds (or euro Treasury-Bills), should they be issued one day,” Fitch said.