OREANDA-NEWS. August 03, 2015. Allocation to sovereign, supranationals and agencies (SSA) has increased to new highs in European money market funds (MMFs), Fitch Ratings says in its latest quarterly publication on European MMFs.

High credit quality and liquid SSAs are an attractive sector for MMFs, which seized the opportunity of slightly higher yields in the second quarter to increase their allocations to the sector to a new high at 15% (compared with 10% a year ago). This was most pronounced for euro and sterling funds. France, UK, Belgium sovereigns, French, German and Dutch government agencies and the European Investment Bank were among the most widely held SSA issuers.

MMFs have also adjusted their bank and counterparty selection following reviews and rating actions (including downgrades) of banks due to declining state support. Notably, more funds have selectively added issuers from the Middle-East region, primarily National Bank of Abu Dhabi and Qatar National Bank (both AA-/Stable/F1+). The region, which historically accounted for 1% of average portfolio allocation, grew to 2.2% in June 2015 with 35% of funds invested in the region and a maximum allocation of 9.2% for individual funds.

The vast majority of euro MMFs are now delivering negative yields (-8bp at mid-July on average), as euro market rates continued to decline. The decline in net fund yields has accelerated notably due to fees normalisation after months of waivers. Sterling- and US dollar-denominated MMFs have continued, in contrast, to experience a modest uptick in yield.

Overnight and one-week portfolio liquidity remained high in 1Q15, with a notable increase in euro MMFs for protection against larger investor flow volatility.

European constant net asset value funds' assets declined 8% to EUR536bn in 2Q15, primarily affecting euro and sterling funds, after reaching a peak at end-March. French Variable NAV funds, the second-largest segment of European MMFs, stabilised at EUR310bn at end-June, after significant intra-quarter volatility.

The full report, "European MMF Quarterly - 2Q15" is available at www.fitchratings.com or by clicking the link above.