European low-volatility net asset value money market funds’ (MMFs) flows have stabilised since a volatile period in March 2020 for all currencies. Total assets in USD low-volatility net asset value (LVNAV) MMFs increased by 30% to USD308 billion at end-May from end-March. By contrast, total assets in USD public-debt constant net asset value (PD CNAV) MMFs dropped by 6% during the same period to USD161 billion at end-May. These flows reflected both investors reversing prior allocations to PD CNAVs from LVNAVs and seasonal inflows.
If the trend that started at end-March continues, Fitch Ratings estimates that total assets in USD LVNAV MMFs should return to their prior February peak around mid-July.
Net asset value deviations for USD LVNAV MMFs recovered in April after the market turbulence in March. In May, net asset value deviations for some funds turned positive as the effect of more conservative fund positioning was reflected in market values.
Liquidity levels for non-government MMFs have increased and were high across all currencies at end-April. Euro MMFs, on average, remained more liquid than USD and GBP funds from endMarch onwards. MMFs’ stances in liquidity vary, with USD funds presenting the widest weekly liquidity positioning range of 40 percentage points, suggesting wider liquidity risk appetite.
What to Watch
Underlying Negative Outlooks: As of 1 June 2020, 76% of the long-term ratings of ‘core’ issuers (defined as held in 25-40 Fitch-rated MMFs) were on Rating Outlook Negative or Rating Watch Negative (RWN). Only a few short-term ratings were on RWN. Fitch expects this percentage to decrease as Rating Outlooks and RWNs are resolved. Fitch considers a lowering of the number of Negative Outlooks as key in resolving the MMF sector’s negative outlook.
Decreasing Yields in USD/GBP: Fitch believes that if yields went negative for USD and GBP MMFs, most investors would ultimately stay with the funds given the lack of alternatives with comparable liquidity and low risk, although the likelihood of material redemption requests may initially be higher.
Ratings Impact: Neutral
Fitch’s MMF sector outlook remains negative, reflecting the potential for continued market stress, notably in terms of portfolio credit quality. That said, these risks have not translated into MMF rating downgrades, reflecting improved liquidity positions and supportive central bank actions.