Sterling and euro prime money market fund (MMF) assets will increase in the coming months amid post-Brexit uncertainty despite record low yields, says Moody's Investors Service.
In parallel, US prime funds are experiencing a spike in outflows ahead of October's regulatory changes.
"Uncertainties around Brexit and the lack of comparable investment alternatives have kept investors in money market funds. 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," says Vanessa Robert, Senior Credit Officer at Moody's.
Despite the drop in MMF yields, Moody's says euro prime MMFs reached their largest size in a year, at EUR 62.9 billion at the end of June 2016, as investors have very few safe alternative investment options. Euro prime MMFs received EUR 7.3 billion of inflows in Q2, equal to a 13.1 per cent increase. Sterling money funds withstood the perfect storm, as their assets under management (AUM) increased by 4.7 per cent in Q2 to GBP107 billion. Meanwhile, the 10 largest Moody's-rated US prime MMFs lost USD 45 billion in June, the largest monthly outflow of the year.
"The upcoming US regulatory reforms, which include a switch to floating net asset values and the introduction of liquidity fees and redemption gates, have led to a spike in outflows from US institutional prime funds — a trend we expect to continue between now and the 14 October deadline," says Jordan Schoenberg, a Moody's analyst.
Moody's expects that due to uncertainty surrounding the regulatory reform, US fund managers will continue to conservatively manage portfolios, with prudent duration and liquidity management taking precedence over yield. US Prime MMF liquidity balances hit new highs in June with the ten largest Moody's-rated US Prime MMFs maintaining close to 50 per cent overnight liquidity in anticipation of a wave of investor redemptions in October.
Euro MMFs' liquidity was also at a 12-month high (35.5 per cent of assets) in Q2 which resulted in the strongest funds' stressed net asset values in a year, at 0.9925. Moody's expects euro prime MMFs' stability profiles to deteriorate slightly: there will be less overnight liquidity and WAMs will be higher, driven by more investments in long-term securities, since the ECB is not expected to raise its interest rates anytime soon.
Sterling portfolio managers will continue to adopt a prudent investment strategy. Moody's anticipates high cash balances and high exposures to government securities, a positive for both credit and stability profiles. In Q2, sterling MMFs exhibited a significant credit improvement, as exposure to Aa3-rated and above securities increased to 70 per cent, the highest level in 12 months, from 63.4 per cent