U.S. Prime-Money Funds Cut European Bank Debt to Five-Year Low

U.S. prime money-market funds cut holdings of European bank debt to the lowest since at least 2006 amid the region’s sovereign crisis, according to Fitch Ratings.

The funds reduced holdings by 9 percent on a dollar basis in October, Fitch said in a report today. The 10 biggest funds now have 34.9 percent of their $642 billion of total investments in European bank bonds and notes, down from 37.7 percent as of end-September.

European banks are being hurt because they hold most of the bonds sold by the region’s governments. German Chancellor Angela Merkel said in Berlin today that Europe’s leaders had “frittered away political trust in the euro” and that a “coherent” response was needed to solve the area’s problems.

“It’s a sign of risk aversion,” said Robert Grossman, the chief credit officer at Fitch in New York and one of the report’s authors. “We’re seeing exposure in general coming down. It’s a very conservative group of investors.”

Instead, the funds are boosting their investment in haven assets and now have 10 percent of their money in Treasuries, Fitch said. Their holdings of European bank bonds have dwindled since reaching a peak of 55.2 percent in the second half of 2009.

To contact the reporter on this story: Louise Meeson in London on lmeeson@bloomberg.net

To contact the editor responsible for this story: Faris Khan at Fkhan33@bloomberg.net