April 9, 2013 / 8:44 PM / 4 years ago

UPDATE 1-U.S. prime money funds trim euro zone bank debt in March-JPMorgan

NEW YORK, April 9 (Reuters) - U.S. prime money market funds reduced their holdings of euro zone bank debt in March as Cyprus' bank troubles rekindled worries about the region's festering debt crisis, according to a report by JPMorgan Securities released on Tuesday.

The report showed the funds cut their ownership of euro zone securities by $44 billion to $203 billion last month, led by broad declines in all types of debt, including commercial paper, repurchase agreements and time deposits issued by those banks.

The drop in euro zone bank debt in March was the largest monthly decline since last June, JPMorgan said.

March's fall nearly erased the prior two months' increases in euro zone bank exposure among prime money funds. Their euro zone exposure was up $1 billion at the end of the first quarter.

"Fund managers likely chose to allow these holdings to roll off on the back of some concerns arising from the Cypriot headlines toward the end of March," JPMorgan analysts said in the report.

Investors feared that a meltdown of Cyprus' banking sector due to bad loans could ripple across the euro zone. The island nation eventually clinched a deal to secure a 10 billion euro ($13 billion) bailout from international lenders.

The JPMorgan analysts reckoned these short-term funds, which are seen only slightly more risky than bank accounts, were not engaging in an "active reduction" of euro zone debt.

Prime money funds also reduced their holdings of U.S. bank debt by $15 billion, to $170 billion, in March.

On the other hand, they raised their stakes in Canadian and Norwegian bank debt in March by $11 billion, to $172 billion, and $12 billion, to $34 billion, respectively, JPMorgan said.

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