EU money funds turn to corporate debt

24/05/2015 02:09 AST

European money market funds have increased their exposure to short-term corporate debt in an unusual move that underlines a changing universe of supply and the ever more difficult hunt for yield.

Corporates now make up 14 per cent on average of the issuers represented in euro-denominated money market fund portfolios, as of the end of the first quarter — more than twice the level of a year ago, according to data from Fitch, the rating agency.

The rise in corporate exposure is fundamentally linked to the pressures on money market funds from negative rates.

“It’s a question of what is available that is both attractively creditworthy and attractively priced,” said Dennis Gepp, a managing director who runs the European money market fund for Federated Investors, the US financial company. “What alternative highly creditworthy options are there?”

Money market funds typically invest in highly rated debt that matures in up to 397 days. They aim to provide investors with liquidity — allowing them to easily withdraw their funds — and modest returns, which have come under major pressure as key central bank rates and bond yields have turned negative.

The rise in corporate exposure in euro-denominated funds — which Fitch deems “unusual” — is closely tied to a reduced supply of unsecured paper issued by financial institutions, which still accounts for most of the assets held in money market fund portfolios.

Average portfolio exposure to unsecured financial issuance in European money market funds dropped below 60 per cent for the first time ever in the first quarter, according to Fitch.

“A key driving factor for this reduced supply results from the regulatory environment,” said Charlotte Quiniou, a director at Fitch. “Basel regulations are constraining the supply of short-dated bank issuance.”

The rise also comes as extremely low borrowing costs — fuelled by major asset purchases by the European Central Bank — have made it more attractive for corporates to issue debt in the single currency.

“Yields are so low in the euro that you have money funds that are trying to find higher-yielding securities among their investable universe,” Ms Quiniou said. “They are able to find that among corporate issuers.”

Procter & Gamble, the US multinational consumer goods company, became the largest unsecured exposure for euro-denominated money market funds in the first quarter, according to Fitch, with funds having an average exposure of 3.5 per cent at the end of the month.

“It is the first time we saw a corporate issuer become the top-held unsecured exposure in money market funds on average,” said Ms Quiniou.

Joe McConnell, a money-market fund portfolio manager at JPMorgan Asset Management, said any rise in exposure to corporate debt was likely to be limited by the credit ratings of corporate issuers.

“You could probably argue money market funds would like a bit more corporate exposure, but a lot of corporates are rated below levels money funds typically will buy,” he said. “Corporates aren’t necessarily looking to move their ratings upwards into tier one.”

Financial Times