Our research shows that non-financial corporates accounted for 6.3% of euro and sterling denominated European MMF assets at the end of October, up from 4% a year before. The biggest increase in euro MMFs was for Procter & Gamble, which on average represents 1.1% of portfolio assets, compared to 0.1% a year ago. For sterling denominated MMFs, the biggest increase was for Unilever, which represents 1% of assets on average, compared to 0% a year earlier. LVMH, BMW, Toyota and Bayer also feature among the main corporate holdings.

Household and healthcare companies with high short-term ratings, whose commercial paper is eligible for inclusion in MMFs, have taken advantage of the extremely low cost to issue. Continued low short-term rates could help drive a further modest increase in MMFs' corporate exposure. Investor demand and low interest rates have also encouraged investment grade corporates with lower short-term ratings, such as Imperial Tobacco and Pernod Ricard, to issue commercial paper. However, these are generally not eligible assets for MMFs.

Corporate debt is in demand among MMFs as a way of diversifying their exposure away from the financial sector, which still represents more than 75% of the average MMF portfolio. It also helps MMFs avoid excessive portfolio concentration as Basel III regulations are constraining money market supply from banks. Demand can be tempered by the lower rates MMFs tend to receive on commercial paper issued by corporates compared to financial institutions, especially in the current low interest rate environment.

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 fitchratings.com
All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
European Money Market Fund Quarterly - Euro - 3Q13
European Money Market Fund Quarterly - Sterling - Q313