Euro MMFs saw their yields fall to 3bp, on average, at end-September after the European Central Bank (ECB) lowered its policy rates earlier in the month. Euro MMFs are closer than ever to posting negative yields as declining short-term market rates have turned negative for most high quality issuers. Earlier investments in longer-dated assets have allowed funds to maintain small positive fund yields until now. As these assets mature, funds are reinvesting at lower, often negative rates, which is expected to push euro MMF yields into negative territory.
Negative euro MMF yields or the use of unit cancellations or other mechanisms to maintain a stable share class in the face of negative yields, in and of itself, would not be a negative rating factor. It will be more relevant how investors react to a negative yield environment and whether this drives redemption activity as investors search for higher yielding alternatives.
In 3Q14, Euro MMFs increased their allocation to sovereigns, supranationals and government agencies (SSA) to a two-year high. Allocation to SSA issuers has increased by more than 200bp over 3Q14, on average, across Fitch-rated European MMFs, reaching 12.4% at end-September. The move happened at the expense of financial exposures, notably short-term collateralised exposures through repurchase agreements, across funds denominated in the three major currencies. It is most pronounced in euro funds as they search for higher yielding investments.
The prospect of prolonged negative euro short-term rates have led euro money funds to increase portfolio weighted average maturities (WAM) to 47 days, which is 10 days longer than a year ago. The WAM for Sterling MMFs remained more relatively stable, while US dollar MMF WAMs declined slightly. Overnight and one-week portfolio liquidity levels remain high at 27% and 39% on average, stable over the quarter.
Across all three main currencies, constant net asset value (CNAV) funds’ assets grew by 7%, continuing their rise that started early 2014. Despite their low yields, even euro MMFs attracted new assets. This reflects negative deposit rates being posted by many deposit counterparties and difficulties in finding suitable liquid alternative investments.
