S&P Global Ratings published its latest "U.S. Domestic 'AAAm' Money Market Fund Trends (Fourth-Quarter 2023)," which tells us, "Assets in MMFs grew to record levels once again in the fourth quarter. Rated government and prime MMFs both increased roughly 3% to $3.3 trillion and $263 billion, respectively. Annual growth in 2023 was higher than in prior years, mainly because cash was a highly attractive asset class and banking stress in the U.S. drove investors to diversify their liquidity sources. Rated government MMF assets grew 18% and prime MMF assets rose 25% during the year." (Note: Please join us for our upcoming Bond Fund Symposium, which is March 25-26 in Philadelphia! See the latest agenda here and click here to register. We hope to see you late next month in Philly!)
The brief explains, "Yields for rated MMFs didn't move quarter-over-quarter for the first time since 2021. However, over the course of the year, yields increased approximately 140 basis points (bps) for rated government and prime MMFs. Quarter-end yields ranged from 4.4% to 5.4% for rated government funds and 5.3% to 5.6% for prime funds."
S&P writes, "Treasury bill issuance remained robust in the fourth quarter.... Managers of rated government funds absorbed much of this issuance. Average Treasury bill exposure increased to 32% from 25% over the quarter. Consequently, repurchase agreements (repo) purchases declined, with average weightings reduced to 44% from 55%. This was also reflected in use of the Fed's Reverse Repo Program (RRP)."
They explain, "Rated prime funds also purchased a small portion of the Treasury bill issuance, with average exposure increasing to approximately 2% throughout the fourth quarter. Managers bought additional asset-backed commercial paper, of which there was higher net issuance during the last quarter relative to the prior three quarters, based on SIFMA data. Weightings in repo, certificates of deposits (CDs), and commercial paper (CP) were stable. However, managers moved into fixed CDs and CP as floating-rate positions matured. The most notable allocation change for the year overall was a slow shift out of overnight bank deposits and into CDs, reflecting managers' intentions to extend maturities and add yield."
The report adds, "With greater conviction about the direction of interest rates, managers further extended the maturity profiles of rated government and prime MMFs by rolling off floating-rate positions and purchasing longer-dated fixed tenors. We previously predicted that weighted average maturities (WAMs) could extend rapidly if Fed rate policy reversed. The Fed hasn't begun cutting rates, but portfolio managers of rated MMFs increased WAM 13 days for government funds and eight days for prime funds, demonstrating their view that the hiking cycle is likely over. Extension in rated government funds exceeded that of prime funds in the fourth quarter, but prime strategies began extending earlier in the year relative to government funds.... The distribution of NAV per share for rated MMFs remained in a tight range. NAV movement of rated funds was biased towards the upside on a quarter-over-quarter basis. At quarter-end, the range for rated fund NAVs was 0.9994-1.0010."
Another S&P quarterly update, "European 'AAAm' Money Market Fund Trends (Fourth Quarter 2023)," comments, "Europe-domiciled MMFs rated by S&P Global Ratings reached an all-time high in terms of assets under management (AUM) as of Dec. 31, 2023, totalling €1.01 trillion (about $1.11 trillion). Net assets in euro and U.S. dollar-denominated funds had also peaked as of year-end 2023. Euro MMF assets reached €200 billion, up 40% in the fourth quarter and up 51% from the end of 2022. One fund added €25.1 billion of AUM to this index during the quarter. Yet even without the inclusion of this fund, assets would have still increased significantly. Net assets in U.S. dollar MMFs totalled $611.9 billion in December, up 5.3% from the third quarter and 20.0% year over year. Although sterling-denominated assets were down 13.9% versus the figure on Dec. 31, 2022, AUM was up 6.2% from the third quarter at £219.5 billion."
It explains, "The interest rate hiking cycle appears to have come to an end, as committee members of the European Central Bank (ECB), Bank of England (BOE), and the U.S. Federal Reserve (the Fed) all voted to hold rates during their monetary policy meetings in the fourth quarter. Despite this, MMF yields continued to rise during that quarter. Seven-day yields on euro MMFs averaged 3.81%, in sterling MMFs 5.23%, and in U.S. dollar-denominated funds 5.35%."
S&P writes, "Since interest rate cuts are on the horizon in 2024, it will be interesting to see whether more investors will place their cash in MMFs rather than bank deposits. In anticipation of such a trend, portfolio managers typically extend portfolio credit and duration attributes to lock in higher yields. Investors may see MMFs as an alternative option for additional yield, while still getting the liquidity, diversification, and safety of principal of managed MMFs."
They state, "Weighted-average maturities (WAM) increased in euro and U.S. dollar-denominated funds, while that for sterling funds remained the same at 34 days. The WAM for U.S. dollar funds lengthened more significantly, to 40 days from 30, while for euro-denominated funds the increase was modest, to 33 days from 32 days in the third quarter. With the rate hiking cycle currently paused, and cuts expected through 2024, we could see different duration strategies being implemented this year instead of the central bank's meeting-to-meeting approach we observed in 2023."
Finally, a third S&P update, "'AAAm' Local Government Investment Pool Trends (Fourth-Quarter 2023)," says, "Both government and prime LGIPs' assets under management increased during the fourth quarter, which is typical for the season. Seasonal inflows at year-end are common among LGIPs because the participants receive tax revenues at the beginning of the quarter. Through the end of the quarter, government funds increased $7.8 billion, totaling $88.7 billion, and prime funds increased by $13.9 billion to $256.8 billion. We also note that like prime money market funds, prime LGIPs can invest in corporate credit securities."
It continues, "The average net asset value (NAV) per share increased above 1.00 to 1.00018 at the end of the fourth quarter, which is well above our minimum threshold of 0.9975 for 'AAAm' rated PSFRs.... This is a trending improvement on the heels of the prior year's policy rate hikes and the current plateau that began in July. Additionally, credit quality has remained stable, and rated LGIP managers continued to focus on conservative investments, maintaining liquidity and high-quality investments. Apart from factors like credit quality, LGIP managers position portfolios for the level of rates."
S&P adds, "Managers continued to expect a plateauing of the policy rate hiking cycle through the end of the quarter. Accordingly, increases in weighted average maturities (WAM) have continued to trend higher from much lower levels during the trailing four quarters, with WAMs finishing the fourth quarter at 36 days and 46 days for government and prime funds, respectively. Much of the maturity extension in government funds can be attributed to reallocation from repurchase agreement securities into Treasuries, and the continuing downward trend of agency floater holdings."
Finally, they comment, "Our WAM index for prime funds increased by five days, quarter-over-quarter, and is 20 days higher from the prior year's end. The government funds WAM index increased even more notably, ending the quarter higher by 11 days, three times more than at the end of 2022.... We note that further maturity extension will be meaningfully affected by how much monetary tightening further deters aggregate consumption. Market participants are uncertain on the expected number range and timing of potential rate cuts."
