NEW YORK: US money market investors have sought to reduce their risk in major global banks and securities firms after Moody's said it launched a credit review of the institutions.
Borrowing costs for the 17 banks and securities firms could rise if Moody's were to downgrade its ratings because of their creditworthiness due to fragile funding conditions, tougher regulations and other issues.
Some investors, in particular regulated US money market funds, would not be allowed to buy debt issued by banks if they were to lose Moody's top-notch "P-1" short-term rating or their long-term debt ratings were lowered, analysts said.
"There's some talk about that in the market. That's being monitored," said Jill King, senior portfolio manager at Horizon Cash Management LLC in Chicago, which oversees $2.5 billion.
J.P. Morgan estimated 58 percent of all US money market funds are rated by Moody's, with combined assets of $1.4 trillion as of the end of January. The funds under review by Moody's owned about $76 billion worth of debt from 11 institutions, which face a possible downgrade to P-2 from P-1.
Those firms include UBS AG, Citibank, Bank of America, Lloyds TSB Bank ; Royal Bank of Scotland plc ; Swedbank AB ; HBOS plc which is part of Lloyds; Danske Bank ; Royal of Scotland NV; Goldman Sachs and Morgan Stanley.
"Although $76 billion is not a trifling sum, for each of these issuers facing the possibility of a downgrade to P-2, the amount of funding exposed to potential rating action is less than 1 percent of total liabilities," J.P. Morgan said in a research report published on Monday.
The money market industry's assets under management total about $2.6 trillion.
Until Moody's completes its ratings review, investors prefer to stick with shorter-dated debt maturing in a month a less from the banks and securities firms.
"The maturities of what investors are looking at have shortened a bit," said David Sylvester, head of money markets at Wells Fargo Fund Management in Minneapolis, which oversees about $400 billion in assets.
The weighted average maturity on debt securities held among prime money market funds is about 61 days, J.P. Morgan said.
In addition to less demand for longer-dated bank paper, J.P. Morgan said the Moody's review could eventually stoke more safe-haven flows into US Treasury and agency bills and limit the decline in interbank lending costs.
Three-month dollar-denominated Libor was fixed at 0.48910 percent on Monday, the lowest since mid-November.
US BILL RATES CLIMB
Despite concerns about bank downgrades and Europe's debt crisis, the bidding for new supply of US Treasury and agency bills came in lower than expected on Monday, analysts said.
Some analysts attributed weaker demand for T-bills and agency bills to more supply and higher rates offered in the competing repurchase agreement (repo) market.
Investors could earn 0.18 percent on an overnight loan in the repo market on Monday, up from 0.14 percent on Friday and above what they could earn on new three-month and six-month bills offered.
On Monday, the US Treasury sold $33 billion of three-month bills at a high rate of 0.115 percent, which was the highest since August 2011. The ratio of the amount of bids submitted for the three-month offering size was 4.24, the lowest in two months.
The bid-to-cover ratio of Monday's $31 billion six-month bill auction came in at 4.32, the lowest in about a year. The latest six-month T-bills sold at a high rate of 0.145 percent, the highest since August 2011.
Freddie Mac sold a combined $2.50 billion in one-month, three-month and six-month bills at higher interest rates than last week.
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