An S&P news release said the report, “Money Market Funds Intensify Their Focus On Safety And Liquidity,” found that many managers have put internal restrictions on the purchase of commercial paper offered through collateralized debt obligations (CDOs) and commercial paper offered out of structured investment vehicles (SIVs).
However the study did admit that, as the market has shown recent signs of stabilizing, several fund managers have again started buying certain commercial paper instruments.
“There’s been a flight to quality in reaction to recent market volatility,” observed Joel Friedman, director in Fund Ratings and Evaluations at Standard & Poor’s. “For about the past month, portfolio managers have not invested in many asset-backed securities, and almost all had stopped buying extendible asset-backed commercial paper (XABCP), where the issuer has the option to extend the maturity to a final predetermined date if it cannot repay the maturing debt.”
In the U.S., the popularity of the safest, and lowest-yielding, instrument -Treasuries- has increased significantly. Following close behind are agency discount notes (from the Federal Home Loan Banks and Freddie Mac, for example), highly rated short-term corporate debt, bank deposits, and overnight repurchase agreements backed by Treasuries and agencies, the study said.
Liquidity isn’t easy to measure, and it’s become even more difficult in the currently volatile market-price environment, S&P said, so managers and investors are now weighing the risks of higher returns against the safety of more liquid and conventional securities.
The report is available to subscribers of RatingsDirect, at www.ratingsdirect.com or can be purchased by calling 212-438-9823.