S&P Global Ratings published three updates on the cash investment space yesterday, including: "U.S. Domestic 'AAAm' Money Market Fund Trends (Fourth-Quarter 2022)," "European 'AAAm' Money Market Fund Trends (Fourth-Quarter 2022)" and "'AAAm' Local Government Investment Pool Trends (Fourth-Quarter 2022)." The first update tells us, "Money market funds (MMFs) received significant regulatory and market attention in 2022, following indicated U.S. MMF reforms, yet to be finalized, and climbing yields that have spotlighted this asset class for investors. Rated U.S. government MMFs had a slight decline in assets during the fourth quarter, and outflows of 9% for 2022, as some investors moved funds into higher yielding products. Rated prime MMFs benefited from higher yields and attracted flows. Assets under management (AUM) in prime fund strategies grew nearly 15% in 2022, landing at $418 billion in the fourth quarter."
It explains, "The Federal Reserve policy was at the forefront of formulating investment strategies throughout the year. The Fed raised rates 425 basis points in 2022, to a target rate of 4.25%-4.50%, making rates challenging to predict. S&P Global economists currently expect the Fed Funds rate to peak at 5.00%-5.25% by second-quarter 2023.... Despite the Fed's aggressive rate path making it difficult to forecast, managers welcomed higher yields not seen in recent history. During the fourth quarter, the seven-day and 30-day net yields for government funds grew to 3.88% and 3.67%, respectively. The seven-day and 30-day net yield for prime funds exceeded those levels, reaching 4.12% and 3.89%, respectively. The spread between government and prime funds continued to widen, reaching a spread of 24 basis points (bps) for the seven-day yield, in the fourth quarter."
S&P writes, "Government MMFs fueled record usage of the Fed's Reverse Repo Program (RRP), which hit $2.5 trillion in December 2022. The RRP remained an attractive avenue to obtain higher rates relative to other counterparties, and to access liquidity, especially at year-end when liquidity is seasonally lean. Consequently, repo exposure in government funds grew to their highest levels in the past 12 months, while allocation to Treasury bills and notes dropped. Elevated concentration in repo may persist in the near-term based on Treasury bill supply, which is affected by Treasury's ability to issue debt."
They add, "In line with previous quarters, the composition of prime funds changed around the margins. Managers slowed purchases of bank deposits and added to their corporate bond positions. Like government funds, but to a lesser degree, prime funds utilized the Fed's RRP more so than in prior quarters, resulting in heavier weighting in repo and lower Treasury exposure. Managers of government and prime strategies shortened their maturity profiles materially over the course of 2022, citing lack of clarity around the level of rate hikes as the driving factor."
S&P's "European 'AAAm' Money Market Fund Trends" piece says, "European-domiciled money market funds rated by S&P Global Ratings totaled €894 billion ($959 billion) in assets under management (AUM) as of Dec. 31, 2022. Notably, we observed net asset growth across the three major currencies in 2022. Euro- and sterling-denominated MMFs had significant inflows of 24% and 23% in the fourth quarter and were up 4.5% and 6.9% from 2021, with AUMs at €132.5 billion and £253.9 billion, respectively. This is the highest year-end euro level since 2011, and largest on record for sterling funds. U.S. dollar funds saw moderate inflows in the fourth quarter of 2%, up 0.78% year over year, with AUM of $510.1 billion at year-end 2022, which is the highest December total registered by S&P Global Ratings."
It continues, "During fourth-quarter 2022, seven-day net yield averages continued to climb in euro, sterling, and U.S dollar funds. The European Central Bank (ECB), Bank of England (BOE), and U.S Federal Reserve (the Fed) each hiked interest rates two times in the quarter. The latest interest rate increases brought the yearly total to 250 basis points (bps) by the ECB, 325 bps by the BOE, and 425 bps by the Fed. We already observed seven-day net yields reaching decade-long highs in third-quarter 2022, and the additional monetary tightening by central banks pushed them even higher. Euro-denominated MMFs ended the year with seven-day net yields of 1.59%, versus sterling MMFs at 3.0%, and U.S. MMFs at 4.23%."
S&P states, "Weighted-average maturities (WAM) declined during the fourth quarter in euro and sterling-denominated funds, while U.S. MMFs remained at 18 days. Euro WAMs dropped sharply to 21 days in December from 26 days in September and Sterling WAMs lowered to 24 days from 27 days over the same period. WAMs across all three currencies were significantly lower at year-end 2022. For comparison, WAMs for euro-, sterling-, and U.S.-dollar-denominated funds were 42 days, 45 days, and 39 days, respectively, at the end of 2021. During a time of aggressive monetary tightening, the recorded WAMs of our rated funds illustrate that portfolio managers are not seeing the appeal of extending further out on the curve."
Finally, S&P's quarterly on "'AAAm' Local Government Investment Pool Trends" comments, "U.S. LGIPs we rate have substantial influence on the management and demand of high credit quality money-market instruments. Such investment pools, with assets collectively exceeding $280 billion, follow a prime or government strategy and are rated under our PSFR criteria. Over the year to December 2022, rated LGIPs following a government strategy (government LGIPs) saw assets increase by 20.6%, while asset growth for rated prime LGIPs was 14.8%, due to improving tax receipts from increased home values."
It says, "Combined with asset growth, the most notable element that all LGIP investors would value is higher LGIP returns. Looking back to December 2021, seven-day yields for government LGIPs and prime LGIPs were a paltry 0.02% and 0.07%, respectively. 12 months later, after several interest rate hikes by the U.S. Federal Reserve Bank (the Fed), LGIP seven-day yields have broken through the 4% barrier for the first time since the global financial crisis.... They are now well on their way to providing a rate of return that can compete with interest on bank deposits."
S&P writes, "Weighted average maturities, key indicators to interest rate risk, have almost halved over the last 18 months. The bulk of the decline in 2022 ... can be attributed to fluctuations in global market conditions caused by geopolitical uncertainty and the rise in inflation that prompted corrective action from the Fed."
