S&P Global published "U.S. Domestic 'AAAm' Money Market Fund Trends (Second-Quarter 2023" recently, which tells us, "MMFs continued to attract inflows in the second quarter of 2023, while stress in the U.S. banking sector carried over from the first quarter, although abated. Growth was slower relative to the first quarter for both rated government and prime funds, in part due to seasonal withdrawals related to corporate tax payments in June. Rated government MMF assets increased 3% quarter-over-quarter, hitting nearly $3.2 trillion. Prime MMF assets increased 5%, ending the quarter at $485 billion." (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.) (Note too: The SEC's recently passed "Money Market Fund Reforms" were just published in the Federal Register yesterday, so the 60 day clock is now ticking on the effective date of the new rules.)
The piece explains, "Yields climbed higher, advancing MMFs as a desirable place for investors to park cash. The seven-day and 30-day net yields for government funds increased to 4.78% and 4.76%, respectively. The seven-day net yield for prime funds surpassed the 500 basis point (bps) range, reaching 5.01%, and the 30-day net yield rose to 4.99%. As we expected, the Federal Reserve is slowing rate hikes due to current economic data. The Fed raised the federal funds rate 25 bps in May, bringing it to 5.00%-5.25%, and held it steady in June. However, economic resilience has spurred uncertainty about the level of additional rate hikes and the probability of a recession."
S&P writes, "Post the U.S. debt ceiling resolution in late May, MMF managers, especially on the government side, welcomed a spike in Treasury bill issuance. Rated government MMFs increased their average Treasury bill exposure to 20% from 15% this quarter versus the first quarter. With the pickup in Treasury bills, repurchase agreements (repo) weighting continued to decline in the second quarter to 58% from 60%. The Fed's reverse repo program (RRP) remained a sizable portion of government funds' repo holdings, but exposure to the RRP overall fell. Additionally, purchases of agency debt decreased due to the recent Treasury issuance and lower supply in the agency space. Prime fund managers also bought additional Treasury bills."
They state, "Contrary to the extremely short bias at the beginning of the year, the maturity profiles of government and prime MMFs lengthened during the second quarter. Weighted average maturities (WAMs) increased by seven days for government funds and five days for prime funds. We think additional extending is likely once the terminal rate peaks, but managers may extend more cautiously in the near future given that the current rate hiking cycle may be pushed out longer considering recent economic data."
The update adds, "The SEC opted for mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5% of net assets, rather than swing pricing. The impacts of such reforms on the industry are yet to be realized. Fund sponsors and investors alike will take time to digest the reforms, and MMFs will have 12 months from when the rules are sent to the federal register to comply with the requirements."
S&P also published, "European 'AAAm' Money Market Fund Trends (Second-Quarter 2023)," which tells us, "In the second quarter of 2023, there was renewed demand for rated European-domiciled MMFs denominated in euros, with net assets increasing 9.8% to €140.2 billion. Net assets for sterling-denominated MMFs declined by 6.3% to £217.6 billion, which followed a fall of 8.6% in the first quarter.... U.S. dollar-denominated funds saw a modest outflow of 0.55% during the quarter to $537.7 billion. We note that U.S.-dollar MMFs ended the first quarter of 2023 with the largest month-end total since we began tracking quarterly risk metrics. When comparing the second quarter of 2023 to this time last year, net assets across all three currencies are up, with euros 37.8% higher, sterling 3.8%, and U.S. dollar MMFs up 10.5%."
It continues, "MMFs seven-day net yields continued to benefit from central bank policy, as yields strengthened in all three currencies in during the quarter. In the second quarter of 2023, the European Central Bank (ECB) and the Bank of England (BOE) each raised rates at their policy meetings. The U.S. Federal Reserve (the Fed) raised rates for a 10th consecutive time in May, before committee members voted to pause the campaign of monetary tightening at their June meeting. Seven-day net yields in euro MMFs averaged 3.4%, in sterling MMFs 4.4%, and in U.S.-dollar MMFs 5.1%. As yields stand in this interest rate environment, MMFs are an attractive asset class for investors that are not only looking for returns, but also liquidity and stability."
S&P says, "Weighted average maturities (WAM) for euro-denominated funds lengthened for funds in all three currencies. Euro MMFs saw the biggest jump in WAM, as maturities moved to 27 days at the end of June from 19 days in March. The WAM of sterling funds saw only a slight increase, to 33 days from 32 days, while the WAM extension was more pronounced in U.S.-dollar MMFs, increasing to 26 days as of June 30, 2023, from 20 in the first quarter. The increase in WAM across the three currencies may indicate that portfolio managers are finding value farther out on the yield curve, since markets are expecting central banks' policy tightening to pause at the end of this year."
Finally, S&P Global Ratings also posted, "'AAAm' Local Government Investment Pool Trends (Second-Quarter 2023)." The report states, "Prime LGIPs' assets rose slightly in the second quarter, to $244 billion, from $235 billion the prior quarter, while government strategies saw outflows of $6 billion to finish the second quarter at $81 billion. Together, these equate to a 0.9% increase in total prime and government assets.... Outflows and slower growth are common in the second quarter owing to the cyclical nature of LGIPs. But overall asset growth in 2023 has been robust, generally attributed to improving tax receipts and competitive returns over money market funds and bank deposits."
It explains, "Following the U.S. Federal Reserve's 25-basis-point interest rate hike in May 2023, LGIP seven-day yields broke through the 5% barrier.... In our view, LGIPs continue to provide a rate of return that can compete with institutional money market funds and interest on bank deposits. The net asset value (NAV) per share averaged 0.99988 in the second quarter of 2023, about 23 basis points higher than our lowest NAV threshold of 0.9975 for 'AAAm' rated PSFRs.... Notably though, managers have continued to follow a prudent investment focus, navigating the rapid interest rate moves with measures to reduce portfolio hazards and improve liquidity."
S&P writes, "LGIP managers continue to concentrate on the Fed's interest rate policy when developing investment strategy. Recently, uncertainty around the debt ceiling faded as the limit was raised through early 2025. Banking sector volatility still raises concerns for investors, leading to a continuation of high credit quality positioning. Government-focused LGIPs, on average, had 68% of their assets maturing weekly in June 2023. Considering maturity extension, prime LGIPs experienced a slight decline in weekly liquidity, dropping to 40% from the previous quarter's 45%."
They add, "The increase in weighted average maturities--a key indicator of interest rate risk--can be attributed to managers predicting a nearing conclusion to rate hikes.... On average, government-focused LGIPs had a weighted average maturity (WAM) of 24 days in June, up from 17 days in the first quarter. Prime LGIPs averaged a 36-day WAM in June, an increase from 30 days. The rise is noteworthy, especially when considering the substantial WAM declines in 2022 on the back of a dramatic increase in inflation prompting aggressive actions from the Fed. When rates peak, a further extension of WAMs is likely."
In other ratings news, Fitch Ratings posted a release, "Money Market Fund Ratings Not Impacted by U.S. Sovereign Rating Downgrade." It says, "The downgrade of the United States' long-term rating (LTR) to 'AA+' from 'AAA' has no immediate impact on money market fund (MMF) ratings, according to Fitch Ratings. A downgrade of the LTR to 'AA+' does not impact the Portfolio Credit Factor (PCF) calculation for Fitch-rated MMFs, which is a primary driver of MMF ratings. Per Fitch's MMF Rating Criteria, credit risk factors of 0.0 are applied to securities issued or guaranteed by highly rated sovereign governments, supranationals and government agencies benefiting from strong market liquidity. Furthermore, the U.S. sovereign maintains its 'F1+' short-term rating despite the downgrade of the LTR."
