U.S. Money Funds Increase Holdings in Euro Bank Debt, Fitch Says

U.S. prime money-market funds increased their investment in European bank debt, focusing on the safest assets amid the euro-area’s debt crisis, according to Fitch Ratings.

The 10 largest funds had 9 percent of their $645 billion of total investments in debt issued by euro-area banks as of the end of August, an increase of 8 percent from the previous month, Fitch said in a report today. Secured lending through repurchase agreements, or repos, rose to 39 percent of exposure to euro- region institutions.

“As some of the increased exposure was through secured borrowings, it shows the funds are still cautious and conservative,” Robert Grossman, a New York-based Fitch analyst who wrote the report, said by phone. “A lot of the increase is explained by more exposure to German banks.”

The funds’ holdings of European bank securities are still down 74 percent since May 2011 because of the region’s debt market turmoil and as lenders seek forms of less volatile funding, Fitch said.

U.S. money fund managers kept investments in U.S. Treasuries and agency debt at more than 34 percent of assets compared with 20 percent in May 2011, Fitch said. Holdings of Japanese bank securities have increased by 130 percent since May 2011 to 13 percent of total assets, the most ever and the largest single country exposure, according to the report.

“Japanese banks may be expanding overseas in markets that are predominantly dollar-denominated like project finance,” Martin Hansen, a Fitch analyst, said by phone. “From the funds’ perspective, there’s an element of geographic diversification.”

Fitch’s sample of the 10 largest funds represented 45 percent of the Investment Company Institute’s estimate of about $1.43 trillion in total assets under management by U.S. prime money market funds.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net