Money funds cut Europe exposure, slowly

January 11, 2012

Prime U.S. money funds further reduced their holdings of euro zone bank paper in December, although the pace of movement slowed while investors continued to hedge against any bank failures, J.P. Morgan Securities said on Wednesday.  The slower movement out of euro zone bank paper was the result of money funds having already strongly reduced their holdings, J.P. Morgan said in a note to clients.

Euro zone bank paper continued to roll off in December from prime money fund portfolios but has seen some slowing as nearly 70 percent of these exposures have been eliminated from prime fund portfolios over the course of the past year. In spite of continued reductions in euro zone bank exposures, prime fund assets under management were basically flat for the second consecutive month reflecting some level of investor comfort in the level of risk in price fund portfolios as much of the cash that left euro zone bank paper has been reinvested in non-European banks and other high-quality products.

The prime money funds had small net outflows of $2.6 billion in December after net inflows of $4 billion in November, according to J.P. Morgan.

The taxable money fund market experienced a significant shift in composition in 2011 with prime money funds losing $177 billion in assets, and government money funds gaining $108 billion in assets as investors sought safety from turmoil in Europe.

Exposure to European bank credit fell by $347 billion last year, of which $331 billion was accounted for by reductions in euro zone bank credit, J.P. Morgan said. The company estimates the top three reductions in exposure by country of origin were to France, Germany and the United Kingdom.

The biggest increases in bank credit by country of origin were to Canada, Japan and Sweden.

Although increases to bank exposures in these banking jurisdictions offset some of the massive declines in European bank exposures, much of the cash that left European banks was reinvested into high quality assets such as Treasury bills and coupons, agency discount notes and coupons and muni variable rate demand obligations.

 

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