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U.S. Money Funds Reduced Euro-Area Bank Holdings in May

The 10 biggest prime U.S. money market funds cut their holdings of debt issued by euro-area banks by $8.3 billion in May as concerns mounted that the 17-country currency union could break up.

The funds reduced holdings of Dutch banks by $3.3 billion last month, while those in German banks declined by $2.9 billion and in French banks by $2 billion, according to data compiled by Bloomberg. Funds increased holdings issued by Japanese, U.S. and U.K. banks by a combined $11.2 billion.

Holdings of debt from European banks, including those outside the euro region, have fallen every month since the end of January, with a combined decline of $20 billion over the period to $178 billion. Elections in Greece have fueled concern that the country may exit from the euro, and Spain this month requested as much as 100 billion euros ($126 billion) from European Union rescue funds to recapitalize its banks. The country’s credit rating this week was cut three steps by Moody’s Investors Service, which cited the nation’s debt burden.

Boston-based Fidelity Investments, the largest U.S. provider of money funds, reduced holdings of European bank securities in the past two months and cut the weighted average maturity of those holdings to two days, Nancy Prior, president of the firm’s money market group, said in a telephone interview on June 8.

More Liquidity

“That goes hand-in-hand with having increased liquidity,” she said.

Pittsburgh-based Federated Investors Inc.’s Prime Obligations Fund had the highest proportion of euro-area bank holdings at 21 percent of assets at the end of May. It was also one of two funds with an annualized yield of 0.19 percent, the highest among the funds surveyed. The other fund was the Western Asset Institutional Liquid Reserves, which is 7.9 percent invested in euro-area banks.

Three funds, including JPMorgan’s Prime Money Market Fund, had an annualized yield of 0.01 percent. The JPMorgan fund had 8.8 percent of assets in euro-zone bank paper. The Vanguard Prime Money Market Fund was the only fund with no European bank holdings.

Melissa Ryan, a spokeswoman at Federated, declined to comment on European bank exposure. Mary Athridge, a spokeswoman for Baltimore-based Legg Mason Inc., Western Asset Management Co.’s parent, said European holdings at the Western fund were concentrated in Northern Europe and Germany and had been reduced by 60 percent over the past 12 months.

Liquidity Pool

In addition to selling commercial paper, certificates of deposit and repurchase agreements to money funds, banks can obtain short-term funding from central banks, inter-bank repurchase agreements or increase deposit rates to attract more money from individual customers. Banks can also hold cash-like instruments in a liquidity pool to meet redemptions.

The survey included Fidelity Cash Reserves, JPMorgan Prime Money Market Fund, Vanguard Prime Money Market Fund, Fidelity Institutional Prime Money Market Portfolio, Fidelity Institutional Money Market Portfolio, BlackRock TempFund, Federated Prime Obligations Fund, Schwab Cash Reserves, Western Asset Institutional Liquid Reserves and Dreyfus Cash Management Fund.

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