Some EU-domiciled money market funds (MMFs) may need to increase their liquidity owing to regulatory reforms, Moody’s predicts.
Saying that UK divergence is a risk for the sector, following December 2023 proposals by the UK regulator for liquidity thresholds above those in force in the EU, some MMFs in the EU may need to increase their liquidity to maintain access to UK markets if the proposals are passed.
This would reduce their yields, said Moody’s in its ‘Sector In-depth’ report.
In July 2023, the US and EU authorities finalised planned reforms of their regulatory regimes for MMFs along lines that are “broadly favourable” to the industry.
However, more broadly, Moody’s report says that geopolitical uncertainty is likely to drive more cash into MMFs despite the likelihood that interest rates will fall this year.
Assets in money market funds reached record levels in 2023, as rising yields “re-established them as a portfolio building block, said Moody’s.
While interest rates will “likely decline” in 2024, Moody’s said it expected further moderate growth of assets under management (AUM) as regional military conflicts and electoral uncertainty make investors more risk-averse.
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Moody’s figures show that US government money market funds and prime money market funds achieved AUM growth of 24% and 46% respectively last year.
In Europe, the AUM of public debt constant net asset value (CNAV) and low volatility net asset value (LVNAV) funds grew by 32% and 7% respectively.
In anticipation that interest rates will soon fall, MMFs in 2023 extended the weighted average maturity (WAM) of their portfolios to lock in higher yields for longer, reducing their liquidity. This trend will likely continue into 2024, although fund managers will remain cautious in case of potential market shocks, said Moody’s.
