FinancialContent is the trusted provider of stock market information to the media industry.
June 19, 2013 at 12:15 PM EDT
Fitch: MMFs Explore Callable Commercial Paper in Value Search

Money market funds (MMFs) are slowly increasing exposure to a relatively new short-term instrument - callable commercial paper (CP), according to Fitch Ratings. MMFs are exploring callable CP as a way to add additional yield and diversification to portfolios, as well as in response to banks' reduced appetite for providing back-up liquidity to traditional municipal securities.

The exceptionally low-yield environment in the money markets is encouraging MMFs to seek new opportunities to offer competitive yields to their investors. Variable rate demand notes (VRDNs), which have one- or seven-day put options, traditionally comprise a majority of municipal MMFs' portfolios. However, VRDNs have been in short supply recently and have seen additional strong demand from prime MMFs, pushing VRDN yields lower. To compensate, tax-exempt MMFs have begun to consider newer instruments that offer longer durations and higher yields, such as callable CP.

Banks that previously provided back-up liquidity to VRDNs have grown more reluctant to do so because of increased costs associated with Basel III's restrictions on commitments that come due in less than 30 days. Callable CP usually has maturities longer than 30 days but is expected to be called by the issuer prior to the 30 day mark, allowing the bank providing support to avoid incurring higher costs.

Due to their novelty, callable commercial paper securities have the potential to yield more than traditional VRDNs and commercial paper. Fitch recognizes that while these relatively new securities have the potential of higher yields, the extended effective final maturities that accompany callable CP, disregarding the call option, will impact MMFs' weighted average lives (WAL). MMFs are subject to a 120 day regulatory maximum restriction on overall portfolio WAL. We believe the practice thus far of MMFs looking to the final maturity date of these securities for liquidity purposes is appropriately conservative for risk-averse vehicles like MMFs, especially those rated 'AAAmmf.'

Additional detail is available in our report, "Callable CP: Short-Term Credit Market Primer," available on our website: 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.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts:

Fitch Ratings
Gwen Fink-Stone, J.D., +1 212-908-9128
Associate Director
Fund and Asset Manager Rating Group.
One State Street Plaza
New York, NY 10004
or
Kellie Geressy-Nilsen, +1 212-908-9123
Senior Director
Fitch Wire
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com
Stock Market XML and JSON Data API provided by FinancialContent Services, Inc.
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.
Markets are closed on certain holidays. Stock Market Holiday List
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.
Press Release Service provided by PRConnect.
Stock quotes supplied by Six Financial
Postage Rates Bots go here
   
Financial Widgets

Display market data, financial news or stock quotes - Learn More

Advertising Network

Advertise on FinancialContent's huge network - Learn More

Web Services

Power your internet and wireless applications - Learn More