The overall volumes that money market funds (MMFs) invest globally in asset-backed commercial paper (ABCP) will likely fall as the prime MMF industry shrinks, says Moody's Investors Service.
Nevertheless, ABCP will remain an important source of investment diversification for MMFs.
"Among money market funds that invest in ABCP, the share of ABCP assets relative to overall portfolio assets will likely only decline moderately," says Marina Cremonese (pictured), vice president – senior analyst at Moody's. "This is credit positive because the funds will not lose the benefit of investment diversification even as their investment strategies become more conservative."
In the US, money market fund reforms – effective as of October 2016 – are causing an industry shift toward government MMFs at the expense of prime MMFs. The reforms will also impose multiple diversification thresholds on ABCP programmes, which will make investing in ABCP more complex for MMFs.
Meanwhile, in Europe, money market fund reforms – likely effective from 2019 – might restrict ABCP investments, by constraining the type of ABCP that MMFs can hold, as well as their maximum exposure.
Despite a 15 per cent drop in the volume of rated ABCP outstanding between March 2012 and March 2016, rated prime MMF portfolios held 7.6 per cent of their assets in ABCP in March 2016 compared to 7.9 per cent in March 2012.
Currently, just a bit more than half of rated prime MMFs invest in ABCP.
Of Moody's rated funds, 46 per cent have no ABCP exposure, whilst 71 per cent have an exposure of less than 10 per cent.
