S&P Global Ratings recently published "U.S. Domestic 'AAAm' Money Market Fund Trends (Fourth-Quarter 2021)," as well as a "European 'AAAm' Money Market Fund Trends (Fourth-Quarter 2021)." They write, "The year ended on a generally positive note for rated U.S. MMFs in 2021. Government fund net assets continued to grow during the fourth quarter, ending at $3.11 trillion. Assets in government funds increased 21% for the year. Prime funds struggled to grow assets in the fourth quarter and experienced net outflows for the year, settling at $365 billion. The minimal spread between prime funds and government funds certainly was a contributing factor. The high probability that the Federal Reserve will hike rates multiples times in 2022 may shift some assets back into prime."
The update continues, "However, there will be further challenges down the road with the looming prospect of potential regulatory reforms, as at the end of 2021 the SEC officially voted on proposed amendments to rule 2a-7 of the Investment Company Act of 1940, under which MMFs are registered. The proposals include increasing the minimum daily and weekly liquidity requirements to 25% and 50%, respectively, removing the requirement for MMFs to impose liquidity fees and redemption gates when they fall below certain liquidity thresholds, and requiring certain MMFs to implement swing pricing so redeeming investors bear the liquidity costs of their redemptions. There may be adjustments based on feedback from industry participants during the 60-day comment period."
It explains, "The asset composition of government funds shifted heavily toward repo. Repo exposure ended the quarter at its highest level for the year with support from the Fed's Reverse Repurchase Program. Fund managers' use of repo was driven by the lack of Treasury bill and agency note supply, which was exacerbated by the significant inflows into government funds. Consequently, usage of the Fed's reverse repo facility hit all-time highs during the second half of 2021."
S&P states, "Prime funds experienced only marginal changes in asset composition over the quarter. Early in the year, managers of prime funds began reducing Treasury exposure, reflecting a partial return to pre-pandemic strategies and the declining Treasury bill supply. Fund managers subsequently allocated more cash into repo, bank deposits, and municipal variable rate securities."
They comment, "Fund yields remained suppressed over 2021, primarily due to the Fed's tight monetary policy and banks being inundated with deposits. This prompted fund managers to implement fee waivers for extended periods, but with the increasing likelihood of interest rate rises in 2022, we will likely see a slow reduction in fee waivers. At the close of the year, the seven-day and 30-day net yields for government funds were 0.02% and 0.01%, respectively, while the seven-day and 30-day net yield for prime funds were both 0.04%."
The piece adds, "Managers continued to keep their funds short-dated, driven by their liquidity targets and the lack of incentive to extend until possible Fed rate hikes. Government fund managers modestly extended the weighted average maturity (WAM) by just one day compared to the previous quarter while prime funds reduced WAM by two days.... Net asset values (NAV per share) for rated funds stayed in a 24 basis point range, between 0.9995 and 1.0019 per share."
The list of "S&P Global 'AAAm' USD Principal Stability Funds–Government funds includes: JPMorgan U.S. Government Money Market Fund ($258.9B), Goldman Sachs Financial Square Government Fund ($223.8B), BlackRock Liquidity Funds FedFund ($180.8B), Morgan Stanley Institutional Liquidity Funds - Government Portfolio ($155.6B), Federated Government Obligations Fund ($142.2B), Allspring Government Money Market Fund ($139.9B), Fidelity Investments Money Market Government Portfolio ($132.7B), Dreyfus Government Cash Management ($132.5B), BlackRock Liquidity Funds T-Fund ($129.5B), BlackRock Liquidity Funds Treasury Trust Fund ($114.3B).
The S&P Global 'AAAm' USD Principal Stability Funds--Prime list includes: JPMorgan Prime Money Market Fund ($69.9B), Florida PRIME ($20.3B), Federated Prime Cash Obligations Fund ($18.0B), State Treasury Asset Reserve of Ohio (STAR OHIO) ($15.0B), Morgan Stanley Institutional Liquidity Funds - Prime Portfolio ($14.7B), State Street Money Market Portfolio ($12.9B), Connecticut State Treasurer's Short-Term Investment Fund ($12.4B), Federated Institutional Prime Obligations ($12.2B), Texas Cooperative Liquid Assets Securities System ($12.1B) and Colorado Local Government Liquid Asset Trust (COLOTRUST PLUS+) ($10.9B).
S&P's "`European 'AAAm' Money Market Fund Trends," tells us, "European-domiciled MMFs rated by S&P Global Ratings closed out 2021 strong, as all three currencies had inflows in the fourth quarter. Euro MMFs saw the largest quarter-on-quarter growth, rising 18%, followed by an 8% increase in pounds sterling, and a 3% increase in U.S. dollar MMFs. Over the year, euro-denominated MMFs increased 1% from December 2020 to €126.8 billion, the highest level since July 2012, which ominously was the month the European Central Bank lowered its deposit rate to 0.00%. Net assets for U.S dollar MMFs also saw year-over-year growth of 4.7% to $506.1 billion, whereas sterling declined 5.3% to £238.3 billion since peaking at £252 billion in December 2020."
It says, "While seven-day net yield averages have remained relatively flat throughout 2021, the fourth quarter displayed mixed results across the three currencies. U.S. MMFs remained consistent, averaging a 0.03% yield, while euro MMFs trended lower, to -0.76%. The seven-day net yield average for 'AAAm' sterling principal stability funds increased to 0.02% in December, the first time in a positive yield environment for S&P Global-rated funds since September 2020. The increase in sterling seven-day yield averages can be attributed to rising market rates leading into the Bank of England's (BOE's) decision to increase the bank rate by 15 basis points to 0.25% after the Monetary Policy Committee meeting on Dec. 15, 2021, with an increasing likelihood of more sterling rate rises throughout 2022."
The "Trends" explains, "In the fourth quarter, weighted-average maturities (WAMs) declined across the rated euro, sterling, and U.S dollar MMFs. The U.S Federal Reserve (Fed) is expected to raise interest rates multiple times in 2022 to combat high inflation, following the announcement in November 2021 that it would taper its bond buying program. With additional rate hikes on the horizon, WAMs are likely to continue their downward trend as fund managers look to take advantage of the potential lift-off throughout 2022."
Finally, it adds, "Since the well-documented market turmoil of March 2020, S&P Global-rated Europe-domiciled MMFs have all seen significant rises in net asset levels with: euro-denominated funds up 46%, sterling-denominated funds up 10%, and U.S. dollar-denominated funds up 22%. This demonstrates the continued investor demand for cash management products, such as investing in rated money market funds despite the unprecedented low interest rates across the three currencies. With multiple rate hikes on the horizon for both the Fed and BOE, and given their high credit quality investments, diversification, and liquidity, MMFs should remain an important short-term investment vehicle for investors to place their cash. In the past 12 months, we affirmed all our 'AAAm' ratings on MMFs."
