Money-market funds are keeping more of their powder dry. Since the credit crisis, according to Fitch Ratings, the 10 largest US prime MMFs have “significantly increased their allocations to liquid assets.”
While part of the reason for high level of liquid assets is new rules implemented in 2010 to make MMFs safer, a sizable portion of that amount is due to good-old-fashioned risk aversion. Currently Europe and a lack of high-quality assets is keeping cash on the sidelines, Fitch said.
As of end-September 2012, liquid assets represented about 45 percent of MMF assets, Fitch said. This compares to the end of 2006 when liquid assets accounted for only about 20 percent of total MMF assets.
In 2010, the SEC implemented Rule 2a-7, which stipulated, among other criteria, a certain level of daily and weekly portfolio liquidity. This required a daily portfolio liquidity of 10 percent (which could include cash, US treasuries and securities that could be sold in one day) and a weekly portfolio liquidity of 30 percent (weekly assets and agency discount notes of 60 days maturity or less).
Fitch said it was too early to tell but suggested it was “unlikely that the currently high allocations to liquid assets will persist, particularly if eurozone volatility were to ease and the supply of high quality assets were to decline further.” As soon as market conditions improve, Fitch said, funds will likely reduce their liquidity levels and extend maturities.
And for funds, having the uncertainty subside is the hope, as having high liquidity hurts performance. “For MMFs, maintaining a high liquidity buffer hampers returns, particularly in the current low-yield environment,” Fitch said. “For example, median fund expenses continued to exceed median yields on Treasury and agency holdings at end-September 2012.”