Fitch: Security and Liquidity Trump Yield in MMFs, for Now

Fitch Ratings says the emphasis for prime money market fund (MMF) investors remains return of capital versus return on capital in the current low-yield environment. MMFs remain an essential option for daily cash management as evidenced by January's $9 billion cash inflows into U.S. prime MMFs despite their miniscule yield.

MMF risk aversion is evidenced by their large holdings of low-yielding short-term U.S. government securities. According to Fitch's most recent study of the holdings of the 10 largest U.S. prime MMFs, 18.7% of total MMF assets under management were in U.S. Treasury and agency paper - a sizable allocation relative to historical levels. Investing in U.S. Treasuries and agencies also enables MMF managers to meet regulatory requirements related to allocations to daily and weekly liquid assets.

We expect that many investors who rely on MMFs as a safe place to park and easily access their cash will continue to do so, shrugging off the Federal Reserve's recently announced intention to keep short-term interest rates near zero until 2014. Institutional investors and corporate treasurers value the safety and liquidity offered via MMFs over yield. For example, Apple Inc. (NASDAQ: AAPL), one of the largest U.S. corporate cash holders with $97.6 billion of cash, cash equivalents, and marketable securities in its coffers, maintains $3.5 billion in MMFs (presumably for liquidity purposes) according to its most recent public financial report. Apple invests the balance directly, illustrating the search for yield for longer-term cash holdings.

The continued success of MMFs as a preferred cash management tool depends on their reputation for safety and liquidity. We believe that investors' ability to access their MMF capital overnight and without incident remains vital to the viability of the industry, trumping low interest rates and other challenges. We also feel investors should remain vigilant in maintaining an understanding of their MMF holdings, as event risk remains high and pursuit of yield could lead to missteps.

For additional information on this topic, please see Fitch's recent Macro Credit Research report,

"U.S. Money Fund Exposure and European Banks: Euro Zone Diverging," dated Jan. 26, 2012 and available on Fitch's Web site www.fitchratings.com.

Additional information is available on www.fitchratings.com

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.