Investors pare US money fund holdings over Greece
Investors are pulling cash from some U.S. money market funds on worries about the funds' investments in European banks in case of a Greek sovereign default that they fear could roil the $2.7 trillion industry.
Despite signs of progress on a rescue for Greece, assets of non-Treasury money market funds -- which are perceived as riskier than funds that own only U.S. government securities -- declined by $3.6 billion on Thursday, while assets of Treasury-only funds rose by $5.2 billion, according to Crane Data, a research firm that tracks the money fund industry.
There were reports on Friday that banks and policymakers moved closer to an aid deal for Greece in advance of a parliamentary vote on a drastic deficit reduction next week, but investors remained on edge. For more see [ID:nLDE75N0CC].
Investors are scrambling for U.S. Treasury bills, a move that pushed T-bill rates into negative territory this week. They also prefer to buy the shortest-dated debt for protection against further market turmoil, analysts said.
"There has been sort of a tidal change, people are a little more nervous about the market now," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts. "When you get a lot of volatility like you are having now, people get a little bit nervous, a little bit more interested in what you are buying."
NO DISTRESS YET
But there is no evidence yet of strain in the financial system as seen during the 2007-2009 global credit crunch. Analysts said quarter-end cash needs and tight T-bill supply exacerbated this week's money market moves.
European banks are still raising short-term funds through sales of U.S. commercial paper and certificates of deposits with a minuscule rise in borrowing costs.
Benchmark interbank rates and certain risk premiums in money markets have stabilized following last week's increase on jitters that a Greek default could spiral into an event akin to the collapse of Lehman Brothers in September 2008.
"The market is just waiting," said Jim Lee, head of short-term markets and futures strategy at RBS Securities in Stamford, Connecticut. "If there were a situation where there was a restructuring of Greek debt, then the contagion would start."
Corporate treasurers and money managers are withdrawing funds from institutional money market funds that invest in commercial paper and other debt issued by European banks. They are putting some of the cash into bank accounts and less risky money funds that own only U.S. government securities, analysts said.
Assets of institutional Treasury money market funds rose by $5.23 billion to $601.5 billion in the week ended Wednesday, while assets of non-Treasury money funds plunged by $16.62 billion to $1.069 trillion, the Investment Company Institute reported Thursday. [ID:nWNA1826]
The latest asset decline in non-Treasury money funds has not caused any negative impact on the overall commercial paper market, according to Federal Reserve data.
Money funds are the biggest buyers of commercial paper, a vital source of short-term cash for U.S. and foreign companies. At the end of 2010, the industry held 45 percent of the $1 trillion outstanding commercial paper, according to ICI.
Still investors are raising their holdings of commercial paper that matures overnight to one week, which are seen as the safest, while they are paring their exposure to longer-dated commercial paper that matures in one to three months, J.P. Morgan (KOSDAQ: 019990.KQ - news) short-term fixed income strategist Alex Roever said.
Weekly commercial paper issuance from top-rated banks including those from Europe (Chicago Options: ^REURTRUSD - news) averaged $2.86 billion through Thursday, compared with $2.67 billion a week ago.
The weekly supply of bank commercial paper due overnight to four days, the shortest maturity for this type of debt, averaged $1.9 billion through Thursday, up from $1.4 billion last week.
On the other hand, the issuance of bank CP due three months or longer averaged $227 million so far this week, down from $599 million last week. (Additional reporting by Chris Reese and Karen Brettell; Editing by James Dalgleish)
