Thursday, August 30, 2012

For money market funds risk aversion comes at a cost

Fitch's latest update on US prime money market funds shows increasing exposure to non-Eurozone banks (Nordic, Swiss, and the UK) as well as to Japanese banks. Eurozone exposure is now minimal.

Source: Fitch

Lending to European banks is increasingly executed via secured transactions (repo).
Fitch: - MMFs continue to exhibit risk aversion. While MMF allocations to European banks increased moderately since end-June, the proportion of secured exposure in the form of repurchase agreements (repos) also continued to climb (see chart, Repos Continue to Rise). As of end-July, repos represent about 36% of MMF allocations to European banks.
Source: Fitch

The retail money markets business is now completely subsidized in order to keep customers that are invested or considering investing in other products of the mutual fund firm. For investors with under $250K in cash, there is no reason to use a prime fund because an FDIC insured savings account at a bank will pay more - with no risk. Fidelity's retail money fund (SPRXX) is paying 1bp per year just to say it's not zero. The institutional prime money fund (FIPXX), with minimum investment of $10 million, pays 16bp per year. Risk aversion comes at a cost.
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