Fitch Ratings published its "Global Money Market Funds Outlook 2024" recently, which explains, "Fitch Ratings' 2024 sector outlook for global money market funds (MMFs) is neutral, reflecting generally neutral credit environment, an expectation of manageable industry flows, and limited impact from regulatory changes. We expect MMFs to continue increasing weighted average maturity (WAM) and weighted average life (WAL) with managers selectively extending duration and maturity to lock in high yields in anticipation of rate cuts in the US and Europe. This may expose funds to valuation volatility from continued macroeconomic uncertainty, which may be exacerbated by geopolitical tensions." (Note: Thanks to those of you attended our Money Fund University in Jersey City this week! Attendees and Crane Data subscribers may access the materials via our "Money Fund University 2023 Download Center.")
The outlook continues, "Revision of a sizeable portion of key banking sectors' outlook to neutral from deteriorating, together with MMFs typical investment universe consisting of mostly high-quality banks which tend to carry stronger rating headroom, support a generally neutral credit environment for MMFs in 2024. We expect the macroeconomic environment to continue to be challenging due to the backdrop of tighter global credit conditions."
It tells us, "Fitch forecasts central banks in the major economies to hold rates at peak levels until 2H24, before reducing rates at different paces. We expect manageable industry flows for most of 2024 as MMFs tend to benefit from duration effect, allowing delays in policy rate cuts feeding through to funds' yields. As a result, there should be balanced industry flows at early stage of anticipated rate cuts across regions and we do not expect a meaningful acceleration of the MMF flows until late next year."
Fitch says, "We expect overall limited impact from regulation reforms in the China and US MMF industry, with Chinese rules focusing on large MMFs and US rules introducing mandatory liquidity fees, which may result in flows out from US prime likely into treasury or government MMFs. In Europe, there are different stances. The EC's review on MMF regulation adequacy did not recommend reform to regulation at this stage and the UK Financial Conduct Authority recently published a consultation paper setting out proposals to update UK MMF regulatory regime."
On "US Money Market Funds," they comment, "Fitch expects the Federal Reserve to maintain the policy rate until 2H24. In anticipation of rate cuts, we expect US MMF managers to selectively extend duration to lock in high yields, while maintaining sufficient liquidity to handle outflows that may result from rate cuts. US MMFs have seen substantial inflows from tightening monetary policy, with assets under management (AUM) in retail funds increasing nearly 40% in 2023. Fitch expects the Fed to maintain the policy rate until 2H24. In anticipation of rate cuts, we expect US MMF managers to extend duration, while maintaining sufficient liquidity."
Fitch also states, "The compliance date for mandatory liquidity fees and increased daily and weekly liquidity levels will be in July 2024. Prime institutional MMFs already maintain daily and weekly liquidity in excess of the new requirements. Unlike the implementation of the last round of '2a-7' reforms, there have been limited outflows from prime MMFs. If this were to materialise, we anticipate most outflows from prime institutional funds would result in inflows to treasury and government MMFs. Fund managers may also seek to merge their prime MMFs to maintain economies of scale."
They add, "We expect US MMFs managers to continue gradually and selectively extending their WAM and WAL to lock in high yields for investors in anticipation of rate cuts in the US and Europe. Increasing maturity rises the funds' market risk sensitivity. Unexpected events, such as a material acceleration in geopolitical tension, could lead to significant spread movements and market pricing volatility."
On "European Money Market Funds," Fitch writes, "Fitch's stable outlooks for the French, Canadian, Japanese, UK and German banking sectors support a more stable credit environment, as MMF portfolios are concentrated in these sectors. The US banking sector still has a deteriorating outlook, which could have a knock-on effect on MMFs with high exposure to US banks. However, vulnerabilities will be assessed on a case-by-case basis, and MMFs' typically invest in high-quality banks, which tend to carry stronger rating headroom."
They continue, "We expect overall balanced industry flows for most of 2024, in light of the anticipation of euro, sterling and US dollar policy rate cuts in 2H24. MMFs tend to benefit from the duration effect, allowing delays in policy rate cuts feeding through to funds' yields. As a result, we do not expect a meaningful acceleration of the MMF flows until late next year.... Fitch expects European MMFs managers to continue gradually and selectively extending their WAM and WAL to lock in high yields for investors in anticipation of rate cuts. Increasing maturity rises the funds’ market risk sensitivity. Unexpected events such as material acceleration in geopolitical tension could lead to significant spread movements and market pricing volatility."
Finally, on "Chinese Money Market Funds," they state, "Chinese MMF assets totalled CNY11.4 trillion at end-3Q23. We expect AUM to continue to grow steadily with interest rates set to stay unchanged and monetary policy unlikely to tighten. Although MMFs yield has been at a record low, investors are inclined to stick to safer assets due to the weak environment and volatility of riskier assets. Real yields in MMFs have been rising due to low inflation."
