Fol­low­ing-Brexit vote after­math, un­scathed money mar­ket fund safe havens at­tract in­flows

Financial Mirror (Cyprus) - - FRONT PAGE -

The shock waves fol­low­ing the EU ref­er­en­dum did not reach the money mar­ket fund (MMF) in­dus­try, as bil­lions flowed into funds, Moody’s In­vestors Ser­vice said. How­ever, the credit im­pact of the vote could shrink the in­vest­ment uni­verse for ster­ling MMFs, as they tend to in­vest in the high­est-rated en­ti­ties.

“Money mar­ket fund as­sets will rise in the com­ing months, par­tic­u­larly in ster­ling funds, as the in­dus­try acts as a safe haven. In­vestors are likely to post­pone in­vest­ment de­ci­sions and cash in hand is likely to be di­rected to­ward liq­uid and low-risk as­set classes. Man­agers po­si­tioned their port­fo­lios con­ser­va­tively in an­tic­i­pa­tion of the ref­er­en­dum vote, mainly by shoring up their liq­uid­ity,” said Ma­rina Cre­monese, a Vice Pres­i­dent at Moody’s.

“Yields of ster­ling MMFs will com­press fur­ther if the Bank of Eng­land cuts rates. How­ever, MMF as­sets would be re­silient, given the lack of equally safe, cash-like in­vest­ment al­ter­na­tives. Even if yields were to fall fur­ther as ex­pected by the mar­ket, for in­vestors favour­ing daily liq­uid­ity, MMFs would re­main a higher-yield­ing, more di­ver­si­fied ve­hi­cle than bank de­posits,” added Vanessa Robert, a Se­nior Credit Of­fi­cer at Moody’s.

In the week af­ter the vote, with GBP1.7 bil­lion flowed into ster­ling MMFs, EUR2 bil­lion into euro MMFs and $24 bil­lion into off­shore US dol­lar MMFs. Moody’s said ster­ling and euro MMFs as­sets are set to in­crease in the com­ing months amid un­cer­tainty. Lower in­vestor con­fi­dence and higher risk aver­sion could cause cor­po­rate in­vest­ments to be post­poned, lead­ing to in­flows into low-risk, highly liq­uid as­sets such as MMFs. Flows in ster­ling and euro-denom­i­nated MMFs showed nor­mal re­demp­tion/sub­scrip­tion pat­terns sev­eral days be­fore and af­ter the vote. Amid a pull­back in short-term is­suance by banks, MMFs have ad­justed their as­set com­po­si­tion to a shrink­ing pool of in­vest­ment op­tions in re­cent years. With reg­u­la­tors push­ing banks to re­duce short-term whole­sale fund­ing, MMFs have broad­ened their in­vest­ment scope to other ge­ogra­phies out­side the UK and EU. Rated Ster­ling MMFs’ largest ex­po­sure was to Aus­tralian and Ja­panese fi­nan­cial in­sti­tu­tions (as of April 2016), while rated Euro MMFs were most ex­posed to US cor­po­rates and Swedish/Ja­panese banks. Moody’s said it ex­pects this di­ver­si­fi­ca­tion trend by ge­og­ra­phy and sec­tor to con­tinue, es­pe­cially as ex­po­sure to UK is­suers could fall.

Moody’s says rated ster­ling MMF ex­po­sures to UK banks were short, with more than 40% ma­tur­ing with seven days and more than half within 15 days as of 1 July 2016. Man­agers of Aaa-mf rated MMFs would main­tain their bar­bell strate­gies — in­vest­ing in longer-term se­cu­ri­ties to ben­e­fit from ad­di­tional yield, while off­set­ting these with in­vest­ments in short-dated se­cu­ri­ties.

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