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European MMFs Lengthen Maturities; Increase Sovereign Exposures

Fitch Ratings says in new reports that European-domiciled money market funds (MMFs) in 1Q14 have lengthened average portfolio maturities and increased their allocations to sovereigns and government agencies, mostly from France, the US and the UK.

During the first quarter of the year European MMFs have been more willing to seize yield-picking and investment opportunities by increasing their allocation to assets with maturity of more than three months. The maturity of portfolios extended as a result, with MMFs' weighted average lives (WAL) reaching 58 days on average at end-March 2014, six days longer than in December 2013. The move was more pronounced for euro- and US dollar-denominated funds.

MMFs have increased their exposure to sovereigns and government agencies over the quarter, reaching 12%, 11% and 8% in US dollar, euro and sterling funds respectively. The increase as mostly concentrated in exposure to the French, US, and UK governments as well as related government agencies.

This, combined with larger allocation to 'F1+' (or equivalent) rated banks such as Nordea Bank, DZ Bank, Standard Chartered Bank and HSBC, resulted in MMFs improving their credit profile through the quarter. On average at end-March 2014, MMFs portfolios were almost evenly split between 'F1+'- and 'F1'-rated issuers.

European MMFs' allocation to banks whose Outlooks have been revised to Negative as part of Fitch's review of sovereign support assumption in bank ratings primarily include ING Bank, Deutsche Bank, Lloyds, Societe Generale, Bank of America and ABN Amro Bank. Fitch expects to review these banks ratings within one to two years so that their Long-Term IDRs will likely be based on the Viability Ratings, currently 'a' for ING and Deutsche Bank and 'a-' for the latter four. Average MMF exposure to these four banks stood at 8% at end-March 2014.

Dispersion among top-held issuers has increased through 1Q14 with notable reduced exposures to Societe Generale (in euro funds) and Deutsche Bank (in sterling and US dollar funds), although they remain important issuers for MMFs.

The full reports, "European MMF Quarterly - Euro - 1Q14", "European MMF Quarterly - Sterling - 1Q14", and "European MMF Quarterly - US Dollar - 1Q14", are available at www.fitchratings.com.

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