Fitch Posts LGIP Q120 Update
Fitch Ratings published, "Local Government Investment Pools: 1Q20" earlier this week. They explain, "Fitch Ratings expects the economic impact of the downturn for local governments to be largely felt in the second half of this year and in 2021, driven by reduced tax revenues, higher unemployment and inevitable budget cuts. In anticipation of this, local government investment pools (LGIPs) continue to build their near-term liquidity profiles to position themselves defensively for the expectation of increased investor redemptions, less cash inflows and the potential for more market volatility in the months ahead. In 1Q20, liquidity LGIPs reduced allocations to repos, CDs and CP while increasing allocations to deposits, MMFs and asset-backed securities (ABS)." The update continues, "Fitch-rated LGIPs were able to successfully manage through heightened market volatility caused by the coronavirus pandemic by maintaining adequate liquidity to meet redemptions while remaining defensively positioned in higher-quality, shorter-dated securities. LGIPs experienced flows cyclicality consistent with the time period relative to the wave of outflows experienced in the prime money market fund (MMF) sector during the peak of the market sell-off. Cumulative assets for the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index increased to a new high of $320 billion during 1Q20, an increase of $10 billion qoq and $40 billion yoy. Asset flows for both indices in 1Q20 (+6% qoq for the Fitch Liquidity LGIP Index and –3% qoq for the Fitch Short-Term LGIP Index) were on par with observed historical cyclical patterns, highlighting the limited effect on these pools during the recent market dislocation." Lastly, Fitch adds, "Not surprisingly, net yields dropped off significantly during the period as the Fed quickly lowered the Fed funds target rate to a range of 0–25 basis points (a cumulative reduction of 150 basis points [bps]) in March. The Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index ended the quarter with average net yields of 1.03% (a drop of roughly 70 bps from YE19) and 1.69% (down 25 bps from YE19), respectively. As LGIPs' longer dated securities mature within the next few months and proceeds are reinvested at lower rates, Fitch expects LGIP yields to continue declining."
