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Money market funds have raised their exposure to asset-backed commercial paper (ABCP) in recent months and increased the average duration of their holdings as a degree of confidence has returned to the sector, according to research by Standard & Poor's.
The findings, although tentative, suggest that the $4,000 billion (Dh17,712 billion) industry may soon start to be in a stronger position to help ease the log-jam in the banking sector, potentially bringing inter-bank lending rates more into line with central bank policy rates.
Triple A-rated money market funds have slashed their exposure to ABCP since the credit squeeze took hold last summer. However, holdings have since stabilised and S&P found evidence of a "slight increase" in activity.
"Money market fund managers, in conjunction with internal credit research teams, have been assessing ABCP opportunities and are currently investing in ABCP programmes that are sponsored by large tier 1 banks and possess full liquidity support," said Andrew Paranthoiene, credit analyst at S&P, who added that these funds were now able to take advantage of "greater than usual spreads".
Improving
Paranthoiene also found that money market funds, which cut their weighted average maturities to increase liquidity as markets turned sour, "are once again looking at opportunities along the credit curve as market confidence is improving".
Like previous analysis of the sector, the S&P study found that the previously homogeneous sector has become polarised.
Some fund managers have totally removed themselves from the ABCP market, gauging that investors are more concerned about capital preservation and liquidity than the opportunity to generate a slight pick-up in yield.
However, Paranthoiene speculated that the funds that had taken this path would, at some point, have to reassess. "Performance does play a key aspect to the sales process," he said. "It will be only a matter of time before investors start asking for more yield by moving their money to funds with better performance."
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