In the first installment of US money market funds versus the eurozone, the funds were seen fleeing the continent as quickly as possible, leaving all sorts of funding chaos in their wake.
In part two, the flight of the US money market funds seems to have intensified, but the outflows have been more clearly redirected… namely into Australian, Canadian and Japanese banks instead.
From Fitch’s Macro Credit Research team on Thursday (our emphasis):
U.S. prime money market funds (MMFs) continued to reduce their exposure to euro zone banks. As of month-end December, exposure to euro zone banks was approximately 10% of total MMF holdings in Fitch Ratings’ sample, a 16% decline on a dollar basis since end-November. Aggregate MMF exposure to European banks outside of the euro zone remained stable at approximately 22% of MMF holdings. Exposure to banks in Australia, Canada, and Japan each increased relative to end November and represents more than 30% of MMF assets, up from 20% of MMF assets as of end-May 2011
And as Fitch also notes, much of the remaining European exposure comes ever more increasingly in the form of repo:
These, meanwhile, are the banks which MMFs are now the most exposed to:
While the following banks are now the most reliant on MMF funding:
So that would be Swiss, British, Japanese, Australian, Swedish and German names — the safest of the safe.
Of course, the one thing the Fitch data doesn’t account for — because the data only goes up to the end of the year – is December’s mega ECB LTRO operation.
Did the Draghi liquidity showering change the trend in any way? As it happens, anecdotal evidence would suggest it did.
As the FT reported earlier this week:
US money market funds have begun moving back into European bank paper, a sign that central bank efforts to backstop key institutions are improving risk appetite. This past week, the funds were buyers in increased issuance of French and Spanish banks’ commercial paper, according to bankers. Notes issued by US banks with foreign parents rose $6bn to $152bn and foreign domiciled bank notes outstanding rose nearly $3bn to $133bn, according to figures from the Federal Reserve.
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Money market funds bought French bank paper with maturities as long as one month, as well as small amounts of Spanish bank paper, according to bankers. The funds also bought longer-dated UK, Dutch and Scandinavian bank paper, up to six-month maturities.
But what we want to know is what this says about the flightiness of US money market flows?
Given the scale of the impact the last time they pulled out, the idea that MMFs represent a somewhat destabilising pool of superfluous liquidity which gushes around from one zone to the next, somewhat unpredictably, is a very haunting prospect.
It’s a bit like a confused bird migration which never manages to touch down for long enough, but brings down loads of airplanes as it travels across the globe.
Not reassuring.
Related links:
US funds return to European bank paper – FT
On the flightiness of uninsured deposits – FT Alphaville
The overnight Black Swan - FT Alphaville