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Euro money funds record 21 per cent drop in AUM as negative yields take their toll, says Moody’s

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Euro money market funds' (MMFs) assets under management (AUM) hit their lowest level in twelve months in the second quarter of 2015 and registered a drop of 21 per cent to EUR54 billion. 

GBP- and USD-denominated MMFs also experienced a fall in AUM in Q2, albeit to a lesser extent, with a 6.4 per cent and 5 per cent decrease, respectively.

"The advent of net negative yields now affecting all Euro prime funds prompted investors to limit their euro-denominated cash balances and/or to invest directly in higher yielding instruments, such as short-dated bond funds or commercial paper," says Vanessa Robert, a Vice President — Senior Credit Officer at Moody's.

Moody's Investors Service today published three new quarterly reports highlighting the key trends affecting prime money market funds (MMFs) denominated in US dollar, euro and sterling. The reports are available to subscribers on www.moodys.com.

Changes in rating reference points for certain bank obligations has had a positive impact on money funds' credit quality in Q2. Following the publication of Moody's new bank rating methodology in March, Moody's realigned the rating reference points used to determine the creditworthiness of a MMF's bank-related investment portfolio.

Credit profiles of euro MMFs slightly improved in Q2, with 62 per cent of AUM Aa3-rated or higher in Q2, up from 58 per cent in Q1, decreasing the funds' sensitivity to market risk. However, there has been a drastic shift to Aa2-rated securities (19 per cent in Q2 vs. 6 per cent in Q1) from

Aa1-rated instruments (15 per cent in Q2 vs. 21 per cent in Q1) driven by decreased investments in highly rated government securities and repurchase agreements to 20 per cent of AUM from 30 per cent. Weighted Average Maturities (WAMs) increased by 1.8 days to 43.3 days in June, reflecting the search for yield in this ultra-low interest rate environment. As a consequence, overnight liquidity declined from 31.7 per cent of AUM in Q1 to 30.7 per cent at the end of Q2, the lowest level in 2015.

The change in rating reference points resulted in a considerable quarter-over-quarter improvement in credit profiles. For US prime funds, the percentage of assets invested in Aa2 or better securities rose to 50 per cent from 41 per cent.

The percentage of overnight maturities to total assets reached its highest point in a year in Q2 with 34 per cent of assets invested in overnight securities on average, up from an already elevated level of 32 per cent in Q1.

"Even though the US money fund reform doesn't come into effect until late 2016, prime fund managers have already begun to increase immediate liquidity in their portfolios to prepare for potentially large asset flows out of prime funds", says Robert Callagy a Vice President — Senior Credit Officer at Moody's.

The credit profiles of sterling MMFs also improved in Q2, with exposures to Aa3- or higher-rated securities rising to 65 per cent of AUM, from 56 per cent in Q1. WAMs hit their highest level in twelve months at 47.3 days on average, driven by higher exposures to relatively long-dated securities maturing above three months to 29.5 per cent of AUM from 26 per cent. The overnight liquidity also declined to 25.5 per cent of AUM at the end of Q2, the second lowest level in 2015.

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