The credit outlook for money market funds in 2011 remains stable, Moody’s Investors Service says in its latest industry outlook. The rating agency notes that volatility in money market funds generally has diminished, and that the conservative portfolio management practices seen in 2010 likely will persist this year.
"The risk profile of money market funds has been dialled down in the past year," says Senior Vice President and author of the report Henry Shilling. "Funds are more liquid, assets’ maturity-adjusted credit quality is higher and their average maturities have been reduced."
The options being considered under still-pending reforms of money market funds are expected to be credit positive, but may dampen funds’ appeal.
"While we expect that proposed reforms, if enacted, will make the system safer for investors, they could also reduce the attractiveness of money market funds, in some cases by increasing costs and lowering yields," says Shilling.
The forces that shaped portfolio investment strategies last year will continue to dominate in the sector. Money market funds are still dealing with historically low interest rates and the attendant near-term interest rate risks. Investor redemptions were smooth and manageable in 2010, but this could change once interest rates begin to tick up, depending on the speed and magnitude of increases.
The funds are also dealing with an unsettled credit environment. Credit conditions are expected to continue to challenge money market portfolios in the United States and elsewhere. Prime funds have significant exposure to the financial sector generally and to banks in particular, and while the asset quality of major financial institutions in the U.S and Europe is improving, we continue to maintain a negative outlook on the banking sector.
The rating agency expects the consolidation trend among US money market funds to continue due to rising operating costs and potential capital and liquidity charges.