Global money funds defensively positioned against market and sovereign challenges in 2012, says Fitch

Fitch Ratings says in a new report that its outlook for Fitch-rated money market funds (MMFs) is stable for 2012, reflecting conservative portfolio management, which leaves MMFs reasonably well-positioned to manage ongoing credit, liquidity and interest rate challenges in 2012.

The Stable Outlook for MMF ratings indicates a limited likelihood of significant ratings changes over the next 12 months. Nevertheless, Fitch considers the MMF industry is facing material challenges including volatile credit markets, eurozone uncertainties, historically low interest rates, the lack of asset supply and ongoing regulatory reforms.

Fitch's outlook incorporates its expectation that MMF managers will continue to defensively manage their portfolios and adjust eligible issuers as needed. However, Fitch notes that the outlook for MMFs remains dependent on the credit conditions of financial issuers globally, given the lack of issuance in the non-financial sector.

In response to the eurozone crisis, US MMFs have reduced or eliminated their exposure to European financial institutions while also increasing available liquidity and holdings of US Treasuries. Fitch expects this defensive credit stance to continue in 2012.

Fitch expects European MMFs will maintain large short-term primary liquidity in their portfolios against recession and eurozone sovereign risks. To limit credit risks, European MMFs are likely to stay focused on the most highly-rated financial institutions, while seeking to increase high-quality nonfinancial assets and secured investments such as repurchase agreements or high-quality asset-backed commercial papers.

With potential regulatory reforms likely in 2012, especially in the US, Fitch will consider the overall implications relative to its MMF ratings criteria and investor expectations.