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Money market fund cash outflows ease after rising on Europe debt fears

July 6, 2011 |  7:09 pm

Cash outflows from money market mutual funds slowed this week, suggesting a lessening of investors’ concerns over the funds’ holdings of European bank debt.

Overall, a net $9.9 billion came out of the funds in the seven days ended Tuesday, or about 0.4% of total assets of $2.66 trillion, according to data firm IMoneyNet Inc.

The net outflow was $18 billion the previous week and $27.5 billion the week before that.

As Europe’s government debt crisis has worsened over the last month, investors began to focus on money funds’ major holdings in short-term debt and certificates of deposit from European banks.

Parthenon The funds have mostly avoided securities from the countries at the center of the crisis -- Greece, Portugal and Ireland -- but have invested in securities from the major banks of Germany, France and Britain.

One risk is that a debt default by Greece or another European country could cause a financial crisis for the continent’s big banks, which hold significant amounts of European 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.

Federal Reserve Chairman Ben S. Bernanke in late June singled out money funds’ European bank holdings as an area of “concern.”

Rival fund giants Fidelity Investments and Vanguard Group have different views of the risk-to-reward trade-off of investing in some European bank debt, as Reuters’ Ross Kerber noted in a story earlier this week.

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

So-called prime institutional money funds, diversified portfolios that often own foreign debt, had cash outflows totaling $21.6 billion this week, according to IMoneyNet. But that was down by almost half from the $39.1 billion that flowed out the week ended June 28.

Prime retail funds, used by individual investors, had an outflow of $2 billion this week, down from $4.8 billion the previous week.

On Wednesday, however, Europe's debt troubles took another turn for the worse.

Some nervous investors have been shifting from prime money funds to funds that own only U.S. government securities. Institutional government-only funds took in a net $10.1 billion this week and retail government-only funds gained $2 billion, IMoneyNet said.

-- Tom Petruno

Photo: The European Union flag flies near the Parthenon in Greece, the country at the center of the continent's debt crisis. Credit: Aris Messinis /AFP/Getty Images

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