Despite record low interest rates, money market fund assets have held their own, according to a survey from Moody’s Investors Service. In addition, the credit quality of money fund portfolios has remained high.

The survey covers the 10 largest retail money market funds and looks at all of 2002 and the first two months of 2003. Portfolio assets remain concentrated in three areas, which together account for 87% of portfolio assets: commercial paper (34.7%), certificates of deposit (24.9%) and U.S. Treasury and government agency securities (27%). Money funds are also invested in bank notes, corporate notes, funding agreements and repurchase agreements.

"We found that a slight expansion in favor of U.S. Treasury and government agency securities and a reduction in portfolio exposure to second-tier and split-rated securities combined to elevate overall portfolio credit quality," said Victoria Baklanova, author of the report. Three funds in particular have led this trend, Vanguard Prime Money Market Fund, Fidelity Cash Reserves and UBS Paine Webber Money Fund.

Because of changes in the credit environment, companies have also tightened their credit standards and are investing less in second-tier and split-rated investments. "In this low interest rate environment, there is absolutely no benefit in taking on additional risk and, in the process, jeopardizing investor confidence in the preservation of the $1.00 net asset value of money market funds," said Henry Schilling, senior vice president in Moody’s managed funds group.

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