Earlier this month, Moody's Investors Service distributed a slide deck entitled, "Money Market Funds – Global: 2022 Outlook," which tells us, "Moody's money market fund outlook is stable, previously negative. Moody's rates 166 MMFs with combined assets under management (AUM) of over $3.6 trillion." Its summary explains, "The return to a stable outlook from negative reflects improving credit conditions, steady assets under management (AUM), an increased likelihood of short-term rate increases, and continued lack of clarity around upcoming regulatory reform." Moody's lists the following points: "MMF outlook raised to stable from negative: Industry has recovered from early COVID market disruption; AUM levels remain at or near all-time highs. Upcoming regulatory change creates uncertainty: More MMF regulation is coming, but its timing and final shape have not yet been decided. Portfolio credit quality remains strong: Improvement in banks' credit profiles and outlooks support the credit quality and stability of prime MMFs, which invest mainly in short term debt issued by financial institutions; Higher short-term rates are on the horizon: Increases in short-term rates will help reduce the impact of fee waivers on MMF sponsors' revenue and earnings; Tail risks are contained: Tapering of US central bank asset purchases, disruption as the deadline for raising the US debt ceiling approaches, the phase out of LIBOR reference rates, stablecoins and regulatory scrutiny of ESG investing pose limited threats to the sector." They ask, "What could change outlook to negative?" Moody's lists these factors: Regulatory changes in the US and/or in the EU making MMFs less attractive to institutional investors; Rapid deterioration in sovereign and bank credit profiles; and the crystallization of tail risks such as a technical US default due to a failure to extend the government's borrowing limit, disruption due to the phase-out of LIBOR reference rates, sponsor concentration, 'greenwashing' allegations and potential stablecoin related disruption." The "Drivers of a stable outlook" include: MMFs' AUM is holding steady in spite of low interest rates; Increased likelihood of short-term rate increases makes MMFs more attractive to investors, improves portfolio yields, and eases pressure on MMF revenues; and the Final shape of upcoming regulatory changes in US and EU is uncertain, but the new rules should make the sector safer and more resilient."

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