US money market funds move back into eurozone banks

US money market funds are starting to move back into the eurozone banking sector after accelerated outflows in the second half of 2011.

US prime money market funds increased their exposure to eurozone banks by 21% in February although this is limited to French, German and Dutch institutions, according to Fitch Ratings.

Figures published by Fitch revealed a 5.1% drop in European bank exposure between July and August last year, with further reductions reported in October.

However, exposure to European banks as a whole declined by 4% last month and exposures remain more than 60% below May 2011 levels. Fitch has interpreted the results as demonstrating a stabilisation effect that indicates risk aversion still has further to run.

Money market funds are continuing to increase their exposures to short-dated US Treasuries at a time when yields are starting to climb. Yields on six-month, one- and two-year bonds reached their highest levels for 2012 this week, with 0.15%, 0.22% and 0.41%, respectively.

Eurozone banks are less likely to take this renewed interest for granted says Martin Hansen, senior director at Fitch Ratings: “Even if money funds’ posture to eurozone banks were to continue to improve, these banks might still be less willing to rely on funds as a source of short-term US dollar funding.”

“This partial disengagement stems in large part from the adjustment challenges that some eurozone institutions experienced during the money fund pullback in 2011.”