U.S. money funds show less anxiety over euro zone

Mon Nov 25, 2013 10:59am EST
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By Richard Leong

NEW YORK Nov 25 (Reuters) - Europe is no longer the forbidden zone for U.S. money market funds, which have been adding to their holdings of securities from the region's banks after slashing their exposure during the height of the euro zone debt crisis two years ago.

Fund managers and analysts said the revived demand for bank paper in particular from German and French banks is underpinned by tentative signs the region is climbing out of a recession.

"Europe continues to have the highest shock risk from a banking perspective than any other region, but clearly those concerns about Europe's financial shocks have been radically reduced in the past 12 to 18 months," said Tom Nelson, chief investment officer at Reich & Tang, a New York-based money market management firm.

The debt costs of Greece and other cash-strapped euro zone member nations have fallen sharply this year, partly due to support from the European Central Bank. This has thawed some of the reluctance among U.S. money fund managers to hold euro zone bank debt.

U.S. prime money market funds, which can invest outside of U.S. government securities, raised their euro zone holdings in October to the highest level since August 2011, according to a report by JPMorgan Securities released earlier this month.

Prime money funds' exposure to the euro zone grew by $22 billion to $251 billion last month. Since the end of 2012, the funds have raised their holdings of that region's bank paper by $49 billion, JPMorgan said in a Nov. 13 report.

The money funds JPMorgan tracks held nearly $1.1 trillion in assets at the end of October, equivalent to 42 percent of the $2.6 trillion U.S. money fund industry. They are major investors in short-term bank debt worldwide.

However, it is unlikely the 17-nation block will return to its glory days when money funds held roughly a fifth of their cash in euro zone bank debt, prior to the onset of the region's sovereign debt crisis.   Continued...