S&P Global Ratings recently published an update entitled, "U.S. Domestic 'AAAm' Money Market Fund Trends (Fourth-Quarter 2020)." They explain, "With $2.9 trillion in assets, it is fair to say that the U.S. domestic government and prime money market funds (MMFs) rated by S&P Global Ratings in 2020 can be divided into two halves. The first half can be categorized as 'inflows,' as fund asset levels grew 35% to $3.2 trillion following market disruption in March because of COVID-19. The second half can be classified as 'outflows,' albeit moderate (-8%), as investors cautiously moved assets out of lower yielding MMFs in pursuit of greater yields elsewhere. Government funds and prime funds both saw outflows of $225 billion (or 8%) and $43 billion (or 10%), respectively, but, overall the year was one of growth for U.S. domestic MMFs."
S&P continues, "Emphasis should be placed on the 33% increase in government MMF assets resulting from wider market concerns related to the pandemic. By contrast, in 2020, prime funds endured net outflows of 11%, coinciding with a dramatic fall in yields. Although these conditions contributed to some consolidation in the prime industry during the year, prime funds have remained a valuable option for institutional investors."
They tell us, "The trajectory of fourth quarter yields is paralleled to the previous quarter. Seven-day net yields declined to 0.02% for both government and prime funds, and 30-day yields settled in close range at 0.02% and 0.08% for government and prime funds, respectively. The deterioration of yields from pre-COVID-19 made fee waivers more prominent for fund managers in 2020 as many utilized them during the year and anticipate needing to do so in the future."
S&P comments, "Government and prime funds took advantage of ample Treasury bills throughout 2020 to support overnight liquidity. Treasury bill exposure in government funds reached a high of 45% by year end. Prime funds decreased their allocation slightly, ending the quarter at 7%.... Weighted average maturities (WAM) moved minimally over the quarter as managers held steady preparing for possible redemptions at year end. Managers extended the maturity of government funds by only one day while prime funds remained unchanged."
They write, "While market liquidity remained a concern, positive yield generation was renewed. Effective 'A-1+' exposure in government funds decreased during the fourth quarter for the first time since March, and purchases of 'A-2' rated overnight repo became a regular strategy managers used to add yield to their portfolios. Prime funds 'A-1+' credit quality remained relatively consistent during the year, averaging 68%. During the third and fourth quarters, comfort in credit was partially restored as managers moved back into CDs and CP, albeit with a focus on higher quality names. Exposure to corporate floating rate securities declined to less than 2%, most likely as the original end date of LIBOR was scheduled for December 2021, but has now been delayed to June 2023."
S&P's "Trends" also says, "Throughout the year we observed significant narrowing of net asset values (NAVs) for rated funds. Nearly all funds ended the year in the 0.9996-1.0005 range. The lower bound at year end was 0.9997, whereas the lower bound during the greatest market stress (first quarter of 2020) was 0.9985. No S&P Global Ratings funds dropped below .9975 during 2020."
Lastly, it concludes, "The impacts from numerous challenges in 2020 will certainly continue in 2021. Major topics on the horizon will be the end of the Federal Reserve's Money Market Mutual Fund Liquidity Facility, possible slowed issuance of Treasury Bills, and the regulatory spotlight once again shone on the industry."
A separate S&P update, "European 'AAAm' Money Market Fund Trends (Fourth-Quarter 2020)," tells us, "European-domiciled MMFs' rated by S&P Global Ratings recorded double-digit net assets growth in 2020, despite the COVID-19 pandemic effects. Euro and sterling denominated MMFs had positive inflows in the fourth quarter, ending the year with assets under management at €125 billion and £252 billion, respectively. The highest euro levels since August 2012 and record highs for sterling. U.S. dollar funds' assets, $483 billion at year-end, declined slightly over the fourth quarter having reached their highest levels, in August 2020, at $524 billion."
It states, "During the fourth quarter of 2020, seven-day net yield averages trended lower across the three currencies compared with the third quarter of 2020. Most notably, S&P Global Ratings calculated seven-day net yield average for 'AAAm' rated sterling-denominated funds, at -0.01% at the end of December 2020, entered negative rate territory for the first time.... In this context, a majority of sterling money-market fund providers continued to apply fee waivers for a zero net yield; however, we saw a number of rated funds amend governing documents for potentially negative interest rates in sterling and in U.S. dollars."
S&P also comments, "Weighted average maturities (WAM) extended during the fourth quarter, with sterling-denominated funds the most notable. However, since March 2020, on average USD funds have extended their WAMs by 11 days, as they seek to offset a potential zero yield. Also, in their thinking is that within a MMFs investment horizon (397 days), there is a very low probability of interest rates drastically changing."
They add, "We consider credit quality to play a key role in net asset value (NAV) stability and view higher-rated assets as reflecting higher price stability. As of year-end 2020, 'A-1+' credit quality percentages represented well above the 50% minimum requirements for 'AAAm' rated funds across the three currencies, with a 67% , 64% and 76% allocation to 'A-1+' issuers held in euro, sterling and U.S. dollars MMFs, respectively.... This is also higher than pre-COVID-19's 2019 year-end levels. However, we noted a meaningful decline of the 'A-1+' issuer allocation compared to September 2020 across the MMFs, which may reflect year-end market conditions and possible improvements in the economic outlook expectations with the start of mass COVID-19 vaccination programs in developed countries."
Finally, S&P says, "In the past nine months money market funds have been tested by the impact of COVID-19, however, in our view they remain an appealing cash management tool for institutional investors. Through a money market fund's high credit quality investments, diversified by issuer, instrument, and geography, with an aim of providing daily liquidity, it is clear to see that MMFs play an important role in the investment world.... [T]he European-domiciled money market funds rated by S&P Global Ratings, with €803 billion (US$981 billion) in assets under management as of Dec. 31, 2020, continue to meet our money market fund criteria metrics."
