Some sterling-denominated money market funds have seen “substantial” outflows due to falling UK gilt prices in recent weeks as some strategies may be forced to convert to a different model, Moody’s Investors Service said. .
The ratings agency said in a market note on Wednesday that low-volatility money market funds — a type of short-term money market fund — may have to convert to a variable net asset value model, which would be a negative credit.
Outputs were not immediately available.
The outflows partly reflect decisions by UK pension funds to sell assets to meet collateral calls on LDI-linked derivative positions, Moody’s said. “The combination of extreme short-term government bond price volatility and investor outflows put downward pressure on the market value (net asset values) of the affected money market funds.”
Under EU regulations, low volatility net asset value money market funds are those where the difference between the market value of the net asset value and the fund’s share price does not exceed 20 basis points. If a fund exceeds this deviation, it must be converted to a variable net asset value money market fund model.
Moody’s said spreads of net asset value to market for low-volatility funds now range from 4 to 13 basis points.
The Bank of England’s intervention to temporarily buy long-term gilts “provided some stability, but the magnitude of the initial declines in net asset value demonstrates the stress the UK bond market was under,” Moody’s said. The threat of forced conversions for low volatility strategies further adds to the “anxiety” of the money market fund industry, Moody’s said.
The agency added that UK sterling-denominated money market funds remain “relatively resilient to extreme market shocks thanks to their proactive risk management”, with low-volatility strategies retaining high levels of liquidity and investment quality. strong credit. The chaos in the bond market also occurred towards the end of the quarter, when the liquidity of money market funds is at a cyclically high level and redemptions generally peak.
However, risks remain elevated and reflect Moody’s view that tensions in the UK bond market are likely to persist.
