Fitch Ratings published "U.S. Local Government Investment Pools Monitor: 1Q25," which states, "Fitch Ratings' two local government investment pool (LGIP) indices reported an aggregate asset increase in the first quarter of 2025 (1Q25) driven by Liquidity LGIPs, consistent with seasonal flow trends. Total assets for the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index reached $655.5 billion at quarter end, marking increases of $9.3 billion qoq and $40.5 billion yoy. (Fitch's tables shows the Liquidity LGIP total at just $430.7 billion and the Short-Term LGIP total at $224.8 billion.) The Fitch Liquidity LGIP Index rose by 2.3% qoq while the Fitch Short-Term LGIP Index fell by 0.2% qoq. These changes contrast with an average increase of 6.2% and average decrease of 1.8%, respectively, during the first quarter over the past three years."
The report continues, "Weighted average maturities (WAMs) in the money market fund (MMF) indices extended in 1Q25, as the Fed held rates steady due to economic uncertainty and inflation expectations. The WAM of the Fitch Liquidity LGIP Index increased to 40 days, still higher than prime '2a-7' MMFs at 31 days. The Fitch Short-Term LGIP Index ended the quarter with a duration of 1.29 years, up 2% since last quarter. Both Fitch indices ended 1Q25 with decreased average yield profiles, with net yields averaging 4.35% for the Liquidity Index and 4.23% for the Short-Term Index."
Fitch also says, "The Fitch Liquidity LGIP Index increased exposure to Repurchase Agreements by 1.67% while reducing exposure to Government Agencies by 1.73% qoq. Managers also added 2.79% exposure to Commercial Paper and Corporates in this quarter."
In other news, the Federal Reserve Bank of New York published, "Nonbanks and Banks: Alone or Together?" in its Liberty Street Economics blog. They explain, "Nonbank financial institutions (NBFIs) constitute a variety of entities -- fintech companies, mutual funds, hedge funds, insurance companies, private debt providers, special purpose vehicles, among others -- that have become important providers of financial intermediation services worldwide. But what is the essence of nonbank financial intermediation? Does it have any inherent advantages, and how does it interact with that performed by banks? In this Liberty Street Economics post, which is based on our recent staff report, we provide a model-based survey of recent literature on nonbank intermediation, with an emphasis on how it competes, or cooperates, with traditional banks."
They write, "The traditional perspective to examining financial intermediation consists of grouping entities (for example, banks, broker-dealers, and finance companies) into 'sectors' that are assumed to carry on similar types of activities over time. Such an entity approach takes the institution or legal form of entity as the primitive object of study to then evaluate how these organizations operate. This approach is less useful in modern times as the boundaries between organizational entities and activities are increasingly fluid."
The blog continues, "For example, modern banks are increasingly engaged in a variety of services usually perceived as 'nonbank' activities, such as underwriting loans, warehousing and servicing the loans, and providing insurance. Likewise, nonbank entities have been engaging in bank-type strategies: for example, private credit firms lend to corporations, and money market fund deposits are available on–demand (similar to uninsured deposits)."
It comments, "Instead, the functional perspective considers 'economic functions' -- such as providing safe assets and managing incentives -- as the more appropriate unit of analysis. Indeed, Merton (1995) argues that such economic functions -- which fulfill a basic economic need -- tend to be more stable, with the observed entities simply reflecting the best institutional structures to carry out those functions under given economic conditions. This view is permeating regulatory domains, too, precisely in the context of NBFIs performing activities like those carried out by other, more regulated entities."
The piece says, "One question that we ask is how macroeconomic conditions affect the rise and decay of financial strategies linked to NBFIs. We study two important cases: special purpose vehicles (SPVs) issuing securitized products as a method to provide safe assets and private credit companies lending to risky borrowers that must be incentivized to repay."
It adds, "The way through which securitization creates safe claims is by pooling many related assets to eliminate their idiosyncratic risk, and then tranching (that is, segmenting) the resulting payouts to provide payment schedules that differ in their risk. Importantly, the payments of the senior (and safest) part of the resulting security can be nontrivial due to the diversification at play: they constitute a minimum return, assuring a guaranteed payment to investors in the senior tranche."
The blog states, "We compare this strategy to 'mutual fund-like' strategies featuring claims that, to provide a safe attractive payment, rely on the possibility of liquidating the underlying assets before these mature. Thus, this strategy offers an 'early escape' from adverse scenarios that will be realized in the future, whereas securitization offers minimum payouts precisely linked to those adverse states."
Finally, it adds, "In this post, we discussed a recent survey on NBFIs that helps illuminate how they might optimally specialize vis-à-vis banks and made applications to special purpose vehicles and private debt provision. Our approach starts with economic functions that fulfill fundamental needs of households and then derives intermediation strategies that best provide these functions. This exercise allows us to better understand the key drivers behind the emergence of NBFIs and how they compete or cooperate with banks."
