–ICI: Asset Managers Preparing For Various Scenarios
–EPFR Global: $37B Outflow From Money Market funds in July 27 Week

By Yali N’Diaye

WASHINGTON (MNI) – That the sovereign crisis topped risks posed to
the global credit markets in most recent fixed investors’ view is no
surprise, but that the only sector to stand out as a brighter spot in
their 12-month outlook was munis was more surprising in the latest Fitch
Ratings survey published Friday.

“This was the sole area to receive more votes than in the January
survey for improving credit conditions (41% versus 31%) and fewer votes
for deteriorating conditions (32% versus 52%),” Fitch said in its latest
Ratings/Fixed Income Forum Survey of fixed income professionals
conducted in June.

The survey otherwise shows that sentiment deteriorated regarding
U.S. and European growth, hence the macroeconomic risk concerns staying
at the forefront.

In fact, the Commerce Department reported Friday that the second
quarter real GDP growth was 1.3%, below analysts’ expectations that had
centered on +1.9%, and the first quarter was revised sharply downward.

Investors are “grappling anew with macro concerns and taking a more
conservative view of cross asset credit conditions — erasing some of
the optimism expressed earlier in the year,” Fitch reported.

That said, inflation was not perceived as concern or a risk to
credit markets this year and next.

“Similar to responses given on higher interest rates, most
investors did not see either as a major cause for worry over the coming
year,” the report said.

Instead, it’s the sovereign risk that worries the most … and this
was in June, when there was still plenty of time to resolve the U.S.
debt ceiling debate.

“While Fitch did not explicitly ask about the U.S. debt ceiling
debate in this recent survey, responses here clearly suggest that
investors are deeply concerned about sovereign issues in general and
believe, if unresolved, they pose a threat to the still fragile
recovery,” the survey said.

And so do fund flows.

Recently money market funds have experienced higher-than-usual
outflows — $62 billion over the past two weeks according to the ICI.

But Investment Company Institute Chief Economist Brian Reid wrote
in a Viewpoint Thursday that, “Like all others in the asset management
business, money market fund managers are preparing for market volatility
that could arise if Congress doesn’t act” to raise the debt ceiling by
August 2.

In particular, “Managers are making their funds more liquid and
turning to shorter term instruments to prepare.”

A spokesperson for the ICI told Market News International Friday
that “While we cannot speak to specific funds’ plans, I think it’s safe
to say that anyone involved in asset management is preparing for various
scenarios related to debt ceiling and other concerns.”

And indeed, market sources confirmed to MNI that the U.S.
Treasury’s debt limit crisis planning has moved into high gear.

Sources said the usual pre-refunding primary dealer meetings, which
would have occurred daylong today so dealers could give their views on
government financing to Federal Reserve and Treasury officials, were
reconfigured last night.

There is now a noon meeting at the New York Federal Reserve with
all the dealers (limited to two persons per shop) presumably to cover
contingency planning into the Aug. 2 debt limit problem.

The ICI declined to comment on whether they were also meeting Fed
and Treasury officials Friday and whether it expects flows to reverse
if/whether the debt ceiling crisis is resolved.

“The impact of a default/downgrade is hard to know and we cannot
make predictions about what the flows will look like in the coming
weeks,” the ICI spokesperson told MNI.

In its latest report published Friday, fund flow data provider EPFR
Global said “german equity, gold and emerging market bond funds take
safe haven mantle as investors flee money market funds.”

“Money Market Funds, the refuge of choice during the height of the
financial crisis in 2008-09, are suffering heavy outflows as fears their
reliance on U.S. government paper could compromise their ability to meet
redemptions if America’s debt ceiling is not raised in time,” EPFR said.
It noted that since the second week of June, over $140 billion has been
pulled out of MMFs.

Yet Reid said assumptions that MMFs are more exposed than other
funds should Congress fail to find an agreement on the debt ceiling are
“overstated.”

“I don’t know of any scenario in which money market funds would be
disproportionately affected compared to other market participants by a
failure to raise the debt ceiling,” he argued in his Viewpoint.

Earlier this month, the ICI had said that “unless the major credit
rating agencies also downgrade short-term debt issued by Treasury and
other federal agencies, money market funds would not be affected by any
change in the AAA/Aaa rating.”

Meanwhile, in the week ended July 27, EPFR Global reported that
MMFs experienced an outflow of $37 billion.

** Market News International Washington Bureau: 202-371-2121 **

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