Less nervous U.S. money funds add more euro zone debt

NEW YORK (Reuters) - U.S. prime money market funds raised their holdings of euro zone bank debt in November, suggesting less anxiety about that region's fiscal troubles and their impact on the banking system, according to a report by JPMorgan Securities.

Prime money market funds added $11 billion in euro zone bank paper last month, led by increased holdings of repurchase agreements with French and German banks, the report, released late on Wednesday, showed.

On a year-to-date basis, these funds' combined euro zone holdings rose by $71 billion to $219 billion.

Prime money funds' exposure to French banks has tripled since the end of 2011 despite the banks' exposure to Greece and Spain whose fiscal woes have been a drag on the euro zone, J.P. Morgan said.

These funds, which can invest in riskier debt in addition to owning U.S. Treasuries, held $94 billion in French paper at the end of November, up $67 billion from the end of last year.

But their French bank holdings were still far below the peak of $224 billion in May 2011.

"Some funds crept back into these credits on the back of calm funding conditions in 2012," J.P. Morgan analysts wrote in the report.

More than half of the increase in French holdings so far this year has been in commercial paper, asset-backed commercial paper, certificates of deposit and other longer-maturity instruments, they said.

U.S. COMMERCIAL PAPER MARKET STABILIZES

Sales of commercial paper in the United States by euro zone and other banks have stabilized in 2012 after a drop-off last year due to intense nervousness about the region's debt crisis spiraling out of control.

In the week ended December 12, the amount of foreign bank commercial paper outstanding was $124.9 billion, down slightly from the previous week and the end of 2011, according to Federal Reserve data released on Thursday.

Analysts attributed part of this decline to companies in general selling less commercial paper and other short-term debt and instead issuing more longer-term bonds to lock in the historic low interest rates.

Moreover, commercial paper activity by euro zone banks has been muted due to major policy moves by the European Central Bank. Since last December, the ECB has injected more than 1 trillion euros in long-term funds into the region's banking system in a bid to provide enough time for banks to raise private capital and to deal with bad peripheral investments.

Mitigating the trend of U.S. money funds stepping back into longer-dated French and German debt was their purchases of repurchase agreements secured by U.S. mortgages issued by French and German banks, J.P. Morgan analysts said.

The analysts attributed the increased holdings in short-term agency repos issued by French and German banks on their higher interest rates versus their commercial paper, ABCP and CDs.

The interest rate on overnight repos backed by mortgage-backed securities has been running in the 0.28 percent to 0.30 percent range, higher than the rate on one-month French bank CP which has been trading at 0.25 percent to 0.28 percent.

As short-term funding activity among euro zone banks have remained well below their peak, prime money funds have bought more U.S. Treasuries, debt from non-European banks and securities from foreign government agencies, J.P. Morgan analysts said.

Prime funds' holdings of Australian and Canadian bank paper rose in November by $14 billion and $11 billion, respectively, to $102 billion and $152 billion, they said.

(Reporting by Richard Leong; Editing by Phil Berlowitz)