The headlines proclaimed - confidence is back and the money-market funds are buying European debt again. This makes perfect sense, Europe is fixed and they are backing up the Corzine truck!! Well, no! According to the report from JPMorgan, Prime MMF assets rose $16bn but the bulk was in secured exposure to German and French banks - not exactly the kind of risk-on short-end exuberance that investors are supposed to infer from the headlines. Just as we have seen everywhere, collateral is king and secured credit is the preferred way - even if it comes at a premium. It seems that while the tail-risk is supposedly gone, even short-duration funds are not comfortable with the conditionality. Isn't it odd how headlines (from Reuters [7]: U.S. money funds add euro zone debt in August) can be so different from reality?
Secured preferred over unsecured - trust remains elusive...
[8]
though the shift into European banks has been material (though entirely secured and core)...
[9]
and:
The increase in secured holdings has been driven by repo and particularly those collateralized by Treasuries and agency MBS. Backed by high quality collateral and executed via triparty, repo provides additional layers of safety for MMFs over unsecured forms of debt, which given the macro risk uncertainty makes repo especially attractive. Combined with elevated repo rates since the start of Operation Twist, it’s no wonder funds have favored repo.
Charts: JPMorgan