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February 2015

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Editorial

Euro MMFs under further pressure

With the prospect of transformative regulation still hanging over the sector, Europe’s money market funds (MMFs) continue to operate against a backdrop of uncertainty. Recent moves by the European Central Bank (ECB) and Swiss National Bank (SNB) are only making matters more complex – for those in the industry, and for corporate treasurers who invest in the funds.

According to a research note released by ratings agency Fitch at the end of January, the yields on Swiss franc-denominated MMFs could turn negative over the coming weeks following the SNB’s decision to cut (already negative) benchmark rates further, as well as ditching the currency’s cap against the euro. Fitch, and its rival Moody’s, also agree that the ECB’s large-scale bond buying programme will likely keep yields on prime euro-denominated MMFs extremely low for a prolonged period, hastening the advent of negative yields for this type of fund. Investors in euro-denominated government MMFs have been experiencing negative yields since the end of 2014.

“The persistent low interest rate environment in the Eurozone, exacerbated by the ECB’s decision to cut its deposit rate to -0.2% in September 2014, has already significantly eroded returns for euro-denominated MMFs. As of 23rd January 2015, the average yield for euro prime constant net asset value MMFs was one basis point, and this is despite the fact that managers are already waiving most or all of their management fees,” said Vanessa Robert, Senior Credit Officer at Moody’s, in a recent report.

Of course, negative yields may lead to outflows from MMFs as investors reassess their holdings. But the scale of the impact is uncertain as low-risk alternatives are also likely to offer negative yields, explains Fitch. This puts everyone in a difficult place. The fund managers must weigh up the best mechanisms to maintain a stable unit value, without significantly increasing credit risk or portfolio maturity. Meanwhile, treasurers must decide what to do with the money they have already invested in MMFs, when the options elsewhere are few and far between.

Treasury Today will continue to keep you updated on moves in the MMF space over the coming months – whether it be around the recently discussed bank-style regulation, or alternatives such as separately managed accounts. Make sure you get all the latest news by signing up to Treasury Insights – our weekly delivery of independent analysis on treasury trends, straight to your inbox: treasurytoday.com/treasury-insights.