Money market funds see more outflows on Europe fears

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Cash outflows accelerated in recent days from some money market mutual funds amid concerns about European debt holdings.

But some investors appear to be switching to funds that own only U.S. government securities rather than leaving money funds altogether.

Overall, a net $18 billion came out of the funds in the seven days ended Tuesday, or about 0.7% of total assets of $2.68 trillion, according to data firm iMoneyNet Inc.

That was smaller than the outflow of about 1% the previous week, even though money funds have come under more scrutiny over the last week as Europe’s government-debt crisis has deepened.

Federal Reserve Chairman Ben S. Bernanke noted in comments on June 22 that the funds have had major holdings in short-term debt or certificates of deposit from large European banks in Germany, France and Britain. Fitch Ratings said in a report last week that the biggest U.S. money funds had about 50% of their assets in paper from those banks.

The key concern has been that a debt default by Greece or another struggling European country could cause a financial crisis for the continent’s big banks, which hold significant amounts of government debt.

That kind of “contagion” occurred in 2008 after the failure of U.S. brokerage Lehman Bros., as shock waves rippled out and banks and other lending institutions worldwide began to cut off credit to one another. A large money fund, the Reserve Fund, collapsed in September 2008 as investors fled after learning the fund owned debt of Lehman. The U.S. quickly moved to temporarily guarantee all money fund assets.

So far, there are no signs of financial trouble at Europe’s mega-banks. And on Wednesday the Greek Parliament voted to adopt new austerity measures, a precondition for the European Union to grant the country a second bailout package to avoid a debt default.

But bond market analysts say many money funds probably have been moving aggressively in recent weeks to pare their European holdings and bring the money back to the U.S., as a precaution.

One sign of that: Yields plummeted last week on short-term U.S. Treasury bills. The yield on 3-month T-bills fell to a mere 0.01% last Friday from 0.043% two weeks earlier.

Some institutional investors began pulling cash out of money funds in late May, no doubt figuring that given the paltry annualized yields the funds pay -- an average of 0.02% -- it made no sense to take any added risk.

So-called prime institutional funds, diversified portfolios that often own foreign debt, have had cash outflows totaling $86 billion since May 24, or about 7.6% of assets, iMoneyNet said.

Those outflows accelerated to $39.1 billion this week from $35.4 billion the previous week.

But some of that money was shifted to domestic funds: Institutional funds that own only U.S. government debt took in a net $27.3 billion this week, up from $5 billion the previous week.

Similarly, prime funds used by retail investors had a net outflow of $4.8 billion this week, or about 0.9% of assets, compared with an inflow of $2.4 billion the week before.

But retail funds that own only U.S. government debt took in $3.2 billion this week, up from $1.4 billion the previous week, iMoneyNet said.

-- Tom Petruno