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MMFs increase WAM and market risk
08 April 2014
Moody’s reveals prime MMFs' heightened sensitivity to interest rates in January and February
Money market funds
Dollar, euro, sterling prime money market funds (MMFs)
increased their sensitivity to interest rates in the first two
months of 2014, according to Moody’s. This trend
led to deterioration in their stressed net asset values.
Dollar prime MMFs increased their aggregate exposure to
European financial institutions to around 31% of total
investments at the end of February from 25% at the end of
Some of this increase came while reducing exposures to
Australian and Japanese financial institutions, whose share of
invested assets declined to 16.5% from 18%,
The credit quality of US prime MMFs deteriorated somewhat,
partly due to their higher exposure to European banks.
After the expected year-end low weighted average maturity
(WAM) driven by high levels of liquidity, prime funds increased
their WAM by 3 days to 42 days and reduced their liquidity
These changes in maturity and credit exposure increased MMFs'
sensitivity to market risk, reducing the average stressed NAV
by 4 bps to 0.9915, according to Moody’s.
The exposure of euro-denominated MMFs to European financial
institutions dropped to 35% of total invests at the end of
February from 38% at the end of 2013.
"Changes in investments in Swedish, Dutch and French
financial institutions were the largest contributors to the
decline. Credit profiles improved as investments in Aaa- and
Aa-rated investments increased by 3.5%, partly because of
higher exposures to repurchase agreements collateralized by
highly rated sovereign securities," said
Euro prime MMFs also increased their average WAM by 10.5 days
to 41.3 days while exposure to securities with maturities above
three months rose to 23% at the end of February from 15% in Q4
2013. "This reflects managers' continued struggle to generate
yield, amid the ongoing unfavourable interest rate
Sterling-denominated MMFs saw little change in their
exposure to European financial institutions. The figure is 44%
of total investments but it is below the 12-month average of
While overnight liquidity remained just above 30% of fund
portfolios, exposures to securities with maturities above three
months rose to 24.1% from 19.7% in Q4. As a consequence, WAM of
sterling-denominated prime funds increased by 4.3 days to 45.1
days, on average. This led to a rise of the funds' sensitivity
to market risk and their stressed NAV declined to 0.9913 on
average at the end of February from 0.9924 at the end of
Sterling prime MMFs increased AuM by 4.3% £102.8bn.