Fitch believes that as the market expands over the next year, and particularly if spreads widen, money fund demand for these securities will increase. In addition, if the FRNs replace some issuance of T-bills as currently expected, money funds are likely to increase allocations to the FRNs.
Treasury FRNs held by taxable money funds at the end of January make up only 0.07% of the funds' assets.
Fitch learned via discussions with fund sponsors that managers are not in a rush to buy Treasury FRNs, and would instead like to see how the market develops, particularly with regards to liquidity. The 4.5 basis point spread over the three-month T-bill set at the first FRN auction was low compared to initial expectations and further reduced money funds' urgency to buy. Managers were also concerned about potential disruptions that a protracted Congressional fight in February concerning raising the U.S. debt ceiling would cause to the Treasury market. A resolution was reached on
An important consideration for buying Treasury FRNs is the effect of these securities on a fund's weighted average life (WAL), as money fund portfolios are limited to a WAL of 120 days. The two-year maturity of the FRNs is consistent with Fitch's eligibility criteria for rated money funds, but will constrain the amount of the security that any fund can buy. For example, the money fund with the largest allocation to the FRNs, at 4.0% of the portfolio, saw its WAL increase significantly, from 50 to 78 days between
Additional information, including on Fitch's rating criteria for money market funds, is available at www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Fund & Asset Management
Source: Fitch Ratings
Most Popular Stories
- 5 Notable Hispanic Technology Executives
- Top Hispanic Tech Companies Push for the Top
- Russia, Crimea Discuss Referendum
- Visa, MasterCard Team Up to Focus on Payment Security
- China Urges Malaysia Flight Emergency Response
- Sunday Starts Daylight Saving Time
- Three Americans on Missing Malaysia Airlines Plane: State Department
- Samsung Launches Milk Music
- For Obama, a Last Stab at Improving Ties with Capitol Hill
- Taco Bell Rings Up Breakfast Menu