With plenty of corporate CP to buy and Europe’s banks on the ropes, money funds are opting for safety over yield.
Treasury investment managers may be getting less risk-averse. But one of their main places to stash cash – money market mutual funds – is moving in the opposite direction. According to Fitch, money funds reduced their exposure to European banks by 9 percent in July, as the euro-periphery’s financial crisis worsened.
The money funds also increased duration, rolling maturing 1-7 day paper into maturities of two months or more. They pulled out of the most parlous investments in Italian and Spanish banks, which accounted for about 2 percent of assets under management at the start of the year. They’ve even trimmed their exposures to German and France, although securities issued by financial institutions in those countries still constitute a significant part of their portfolios.
Interestingly, UK issuers saw a small uptick in money fund interest in July, rising from around 10 percent of money funds’ AUM to just shy of 11 percent. Britain’s long-standing disdain for the euro now looks savvy.
So where can money funds go for yield? Corporates are flooding into the US commercial paper market, but near-zero official rates are keeping rates anchored, and spreads haven’t widened in tandem with the increase in corporate credit risk at mid-month. Credit default swap spreads on US investment grade corporates recently hit a 14-month high, according to financial information services company Markit.
But with the Federal Reserve stating that it would keep rates low until 2013, companies won’t have to pay up on short-term securities issues, even if their CDS spread balloons. That’s could be good for treasurers, but it’s not so good for treasury investment managers.