S&P Global Ratings published, "U.S. Domestic 'AAAm' Money Market Fund Trends (First-Quarter 2024)," earlier this week, which tells us, "Flows into rated MMFs were net positive for the first quarter. A small decline (-0.3%) for government MMFs was offset by the 6% growth for prime MMFs. The decline in government MMF assets was the first in more than 12 months. In our view, while interest rates remain high, the small dip in government MMF assets is likely temporary. It's not uncommon for seasonal swings to occur around the long, Good Friday holiday weekend and the April 15 tax date. Rated government and prime MMFs ended the quarter at $3.3 trillion and $279 billion, respectively."

They comment, "Yields for rated MMFs peaked and began trending in the opposite direction from prior quarters. Markets have begun pricing in potential rate cuts by the Federal Reserve later this year, driving yields lower. First quarter-end yields ranged from 4.3% to 5.5% for rated government funds and 5.2% to 5.6% for prime funds."

S&P writes, "Managers of rated government funds continued to shift exposure from repurchase agreements (repo) into Treasury bills, given relative value and supply. Average Treasury bill exposure increased to 36% from 32% over the quarter, whereas average weightings in repo decreased to 40% from 44%. Net Treasury bill issuance began declining during the quarter, and the U.S. Treasury Department has indicated that it will reduce the bill supply. Consequently, there may be movement back into repo and possibly increased usage of the Fed's Reverse Repo Program (RRP). For rated government funds with agency exposure, the level of agency holdings was stable, but exposure became biased towards fixed rate securities."

They state, "Asset allocations in rated prime funds were generally stable quarter over quarter. Managers purchased additional Treasury bills, bringing average exposure to approximately 4%. Weightings in certificates of deposits (CDs) and bank deposits decreased moderately, and like government funds, there was a slight preference for fixed rate exposure. Effective 'A-1 +' credit quality increased slightly in rated government MMFs and more noticeably in rated prime MMFs. Higher effective 'A-1 +' credit quality exposure in prime MMFs was primarily driven by managers shortening the maturity profiles of their funds."

S&P says, "Managers of rated government and prime MM Fs shifted gears with respect to maturity profiles. During the quarter, average weighted average maturities (WAMs) for government funds increased to as high as 42 days in February, but soon after decreased by quarter-end. Prime fund average WAMs decreased throughout the quarter, by nine days overall. Through our engagement, managers cited various reasons for shortening portfolios, like expecting delayed rate cuts and preparing for new 2a-7 MMF regulations."

The piece adds, "Specifically, prime fund managers increased short-dated exposures to meet the 25% (daily) and 50% (weekly) liquidity requirements, which became effective in April 2024. Additionally, a number of prime funds are avoiding maturities after the October timeframe, as fund sponsors work through adapting to the remaining new rules, especially the logistics of the mandatory liquidity fee, and subsequently which liquidity products to offer investors.... The distribution of NAV per share for rated MMFs narrowed quarter over quarter as a result of some funds moving downward. At quarter-end, the range for rated fund NAVs was 0.9993-1 .0010."

S&P also posted the summary, "European 'AAAm' Money Market Fund Trends (First Quarter 2024)." This update says, "Europe-domiciled MMFs rated by S&P Global Ratings reached another all-time high in terms of assets under management (AUM) as of March 31, 2024, totalling €1 .15 trillion. In the 12 months to March 2024, net assets in euro and U.S. dollar-denominated funds have increased 55% (see chart 3) and 13% (see chart 7), respectively, while sterling-denominated fell 4% over the period (see chart 5). Since the U.K.'s mini-budget crisis and the recorded asset highs of £266 billion in October 2022, sterling-denominated fund assets have fallen 16% but have operated within a +/-5% range of monthly totals over the past 1 2 months."

It continues, "Since interest rate cuts are on the horizon in 2024, in the first quarter we have seen seven-day net yields fall, with sterling and U.S. dollar-denominated funds both dropping by seven basis points (bps) to 5.16% and 5.28%, respectively. Seven-day net yields for euro-denominated funds rose five bps over the first quarter but have since fallen seven bps from their January 2024 peak to finish the quarter at 3.86%."

They write, "We have commented in the past that as interest rates decrease, we are likely to see an extension of weighted-average maturities (WAM) profiles. Sterling-denominated funds have had the largest WAM extension during the quarter with an average extension of 10-days, finishing the quarter at 44 days. Correspondingly, euro and U.S. dollar funds each extended one day during the first quarter. Notably, though, in the 12 months to March 2024, euro funds have extended 15 days, sterling funds 12 days, and U.S. dollar funds 21 days."

S&P tells us, "We consider credit quality to be a key factor in the stability of net asset value (NAV) and view the price of higher-rated assets as more stable than investments with lower ratings. All three currencies show a consistent trend of average 'A-1 +' portfolio credit quality during the first quarter increasing to 60% from 58% (see chart 2). Average 'A-1 +' credit quality in U.S. dollar funds was flat at 75% in the fourth quarter of 2023, while average 'A-1 +' credit quality of sterling MMFs decreased slightly to 64% from 65%. Consistent with our expectations, 'A-1 +' credit quality in Europe-domiciled MMFs has been maintained above the minimum 50% minimum metric for 'AAAm' rated funds."

Finally, S&P also published "'AAAm' Local Government Investment Pool Trends (First-Quarter 2024)," which says, "Both government and prime LGIPs continued their seasonal growth in the first quarter. Government LGIPs expanded to $98 billion (a 10% increase from the prior quarter), and prime LGIPs grew to $279 billion (an 8.6% increase from the prior quarter).... Prime LGIPs are those that have the ability to invest in corporate and bank credit securities -- similar to prime money market funds. Inflows at year-end and into the first quarter are common due to the cyclical nature of LGIPs, primarily attributed to seasonal tax revenue."

The LGIP update explains, "In our view, LGIPs maintain a competitive edge net of fees as they outpace bank deposits and institutional money market funds. Following the U.S. Federal Reserve's rate hikes in 2023, LGIP seven-day and 30-day net yields remain above 5%.... In first-quarter 2024, there was a slight decrease in both prime (5-basis-point decline) and government seven-day net yields (4-basis-point decline). Although still notable, the slight decline can be attributed to a small drop in Treasury yields in addition to other securities LGIPs utilize (such as commercial paper and deposits) as part of their asset allocation."

It states, "The net asset value (NAV) per share has remained stable for 'AAAm' PSFRs.... In our view, this is a result of managers continuing to prioritize liquidity and high-quality investments. The first-quarter NAV average is 25-basis-points higher than our lowest NAV threshold of 0.9975 for 'AAAm' rated PSFRs. Weekly liquid assets for government funds stood at 49% while prime funds were 40%, relatively even to prior-quarter figures."

S&P adds, "Given the direction of rates typically influences fund managers, there was a consistent rise in weighted average maturities (WAM) in 2023. First-quarter 2024 marked the first occurrence in over a year that WAMs remained the same or declined, implying uncertainty on direction and timing of rate cuts from the Fed. Additionally, limited value in extending may be a contributing factor. On average, government-focused LGIPs had a WAM of 36 days in March, the same as at the end of fourth quarter. Prime LGIPs averaged a 40-day WAM in March, a decrease from 46 days."

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