Dollar, euro, sterling prime money market funds (MMFs) increased their sensitivity to interest rates in the first two months of 2014, according to Moody’s. This trend led to deterioration in their stressed net asset values.
Dollar prime MMFs increased their aggregate exposure to European financial institutions to around 31% of total investments at the end of February from 25% at the end of 2013.
Some of this increase came while reducing exposures to Australian and Japanese financial institutions, whose share of invested assets declined to 16.5% from 18%, Moody’s noted.
The credit quality of US prime MMFs deteriorated somewhat, partly due to their higher exposure to European banks.
After the expected year-end low weighted average maturity (WAM) driven by high levels of liquidity, prime funds increased their WAM by 3 days to 42 days and reduced their liquidity levels.
These changes in maturity and credit exposure increased MMFs' sensitivity to market risk, reducing the average stressed NAV by 4 bps to 0.9915, according to Moody’s.
The exposure of euro-denominated MMFs to European financial institutions dropped to 35% of total invests at the end of February from 38% at the end of 2013.
“Changes in investments in Swedish, Dutch and French financial institutions were the largest contributors to the decline. Credit profiles improved as investments in Aaa- and Aa-rated investments increased by 3.5%, partly because of higher exposures to repurchase agreements collateralized by highly rated sovereign securities,” said Moody’s.
Euro prime MMFs also increased their average WAM by 10.5 days to 41.3 days while exposure to securities with maturities above three months rose to 23% at the end of February from 15% in Q4 2013. “This reflects managers' continued struggle to generate yield, amid the ongoing unfavourable interest rate environment.”
Sterling-denominated MMFs saw little change in their exposure to European financial institutions. The figure is 44% of total investments but it is below the 12-month average of 47%.
While overnight liquidity remained just above 30% of fund portfolios, exposures to securities with maturities above three months rose to 24.1% from 19.7% in Q4. As a consequence, WAM of sterling-denominated prime funds increased by 4.3 days to 45.1 days, on average. This led to a rise of the funds' sensitivity to market risk and their stressed NAV declined to 0.9913 on average at the end of February from 0.9924 at the end of 2013.
Sterling prime MMFs increased AuM by 4.3% £102.8bn.