Sober Look | Apr 02, 2012 01:50AM ET
The ECB's LTRO program accomplished much in terms of reducing liquidity risk in the Eurozone's financial sector. But as is often the case with government interventions, it created numerous "unintended consequences". One of those effects is a massive reduction in the availability of short-term non-government paper. This paper has been taken out of the market for two reasons:
1. With attractive term financing from the ECB, there is far less need to issue euro denominated commercial paper or short-term notes.
2. A great deal of short-term paper that has been issued is trapped at the ECB (more precisely the NCBs) as collateral and is not coming out any time soon.
This is creating difficulties for euro denominated money market funds. As an example, below is a chart for the JPMorgan Luxembourg formed euro money market fund (ticker symbol JPMELRF LX). It has become difficult for the firm to retain investors because the return on this fund has literally flat-lined.
Needless to say JPMorgan is not happy about that.
Reuters: "The LTROs are a double-edged sword," said John Donohue, chief investment officer for J.P. Morgan Asset Management Global Liquidity. "They calmed everybody down and took the liquidity tail risk off the table for money funds. But there is less supply now for us to get invested."
Ultimately this may mean banks, companies, and governments will need less short-term funding, a so-called crowding out effect. That could result in fewer investment opportunities for money market funds, which generally prefer taxable investments thanks to their higher yields.
Near zero (or sometimes zero) rates combined with the uncertainties around the money market product are sending Eurozone investors out of the product. The total euro denominated money market balances have declined sharply in recent months.
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