Investors hunger for euro cash funds even as credit quality falls

The overall credit quality of instruments in euro-denominated money market funds (MMF) deteriorated significantly in the first quarter, at the same time investors seeking greater safety boosted assets in them.

Analysis by Moody’s found the greatest movement downwards in MMF assets in the funds last quarter was from Aa3 to A1, the fourth and fifth highest instrument ratings respectively.

Exposure to A-rated securities more than doubled to reach 46% of the prime funds’ assets, up from 20% in the beginning of the quarter, Moody’s noted.

The proportion of assets vested in Aa3-rated assets shrunk commensurately, while the portion in Aa2-rated paper – the next highest rating – fell to almost zero.

Euro money market funds kept their commitments to Aaa and Aa1 rated assets more stable during the period.

Over the last quarter, combined AuM increased by 2.7% to €115.8bn, “despite the low interest-rate environment and low yields across the sector”.

More recent, separate analysis by monitors iMoneyNet found, in the week to 11 May, assets in euro prime funds fell by €148.4m to €112.35bn, and euro Government funds had outflows of €719.9m to €11.11bn.

Assets in sterling-denominated equivalent funds both rose over the same week.

Moody’s analysts said the general deterioration in credit quality exposure of the €116bn euro fund category came due to pressures on both European sovereigns and banks, resulting in several downgrades and opening rating reviews of 114 financial institutions in February alone.

Notwithstanding this there was little fall in the relatively short weighted-average maturity (WAM) of the euro-denominated funds, which remained at around 32 days on average throughout the first quarter.

“However, investments in securities with maturities of between one and three months increased to 32%, from 26% during the first quarter, with WAM increasing from 31 to 34 days.”

Overnight liquidity of the funds remained high, at around 40.5% on average.



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