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US dollar-denominated money market funds to see significant outflows in Q2 2016, says Moody’s

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Up to 50 per cent of remaining investor assets will likely leave US prime money market funds ahead of major regulatory reforms in October, says Moody's Investors Service. However, demand for euro prime funds is expected to be resilient despite record low yields.

Total assets in the ten largest Moody's-rated offshore US Dollar prime funds fell 10 per cent in 1Q 2016 as investors sought out higher yielding opportunities for their cash following year-end.

"We expect US prime fund managers to limit investments in securities with maturities past October as they proceed cautiously in anticipation of the switch to floating net asset values," says Rory Callagy, a Vice President — Senior Credit Officer at Moody's.

"However, demand for euro prime funds is resilient amid uncertainties around Brexit and a lack of comparable investment alternatives," adds Vanessa Robert, a Vice President – Senior Credit Officer at Moody's.

Investors will likely continue to use euro-denominated MMFs as higher-yielding liquid vehicles with greater diversification than bank deposits. To date, this dynamic has kept euro CNAV MMFs' collective assets under management (AUM) from falling much below EUR70 billion.

In anticipation of the Brexit referendum in June, Moody's expects euro and sterling portfolio managers to increase their funds' liquidity and exposure to government and agency securities, a positive for the funds' credit quality and market risk profiles.

The rating agency also expects these funds to be a safe haven ahead of the Brexit vote. Positive inflows are likely amid heightened market uncertainty and volatility related to the referendum on 23 June to decide whether the UK should exit the 28-member European Union.

Collectively, the Sterling prime money market funds' AUM increased to GBP156 billion at the end of Q1 from GBP151 billion at the end of the year, while the Moody's rated funds experienced GBP877 million outflows to GBP102 billion during Q1.

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