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U.S. Domestic 'AAAm' Money Market Fund Trends (Second-Quarter 2023)

Market Comment

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.

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 400 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 Global economists forecast no remaining rate hikes in the current cycle, followed by cuts in mid-2024. Additionally, they revised their baseline forecast to a shallower and more protracted slowdown in the U.S. rather than a recession. (see "Economic Research: Strong U.S. Jobs Report Makes A Rate Hike All But Certain In July," July 13, 2023, and "Economic Outlook U.S. Q3 2023: A Sticky Slowdown Means Higher For Longer," June 26, 2023).

Table 1

'AAAm' principal stability funds seven-day net yield (%)
Index Jun-22 Sep-22 Dec-22 Mar-23 Jun-23
S&P Global Ratings 'AAAm' government MMFs 1.1 2.64 3.88 4.42 4.78
S&P Global Ratings 'AAAm' prime MMFs 1.27 2.75 4.12 4.58 5.01
MMF--Money market fund.

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. Although Treasury bill exposure for prime funds remained minimal, their exposure doubled quarter-over-quarter. Exposure to commercial paper (CP) grew, as managers sought to capitalize on the steepness of the CP curve. Purchases of certificates of deposit also saw an uptick. Consequently, weightings in repo, corporate bonds, and asset-backed commercial paper were lower.

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.

Table 2

'AAAm' principal stability funds weighted average maturity (in days)
Index Jun-22 Sep-22 Dec-22 Mar-23 Jun-23
S&P Global Ratings 'AAAm' government MMFs 27.0 19.0 15.0 16.0 23.0
S&P Global Ratings 'AAAm' prime MMFs 24.0 19.0 22.0 26.0 31.0
MMF--Money market funds.

Effective 'A-1+' credit quality remained unchanged for government funds during the second quarter. Prime funds experienced a slight downward migration of effective 'A-1+' credit quality, coinciding with greater opportunities to invest out the yield curve.

Table 3

'AAAm' principal stability funds 'A-1+' credit quality (%)
Index Jun-22 Sep-22 Dec-22 Mar-23 Jun-23
S&P Global Ratings 'AAAm' government MMFs 98.0 98.0 97.0 97.0 97.0
S&P Global Ratings 'AAAm' prime MMFs 67.0 70.0 66.0 67.0 64.0
MMF--Money market fund.

The distribution of net asset values (NAV per share) for funds widened slightly, with a few funds moving lower. At quarter-end, all fund NAVs were above $0.9992.

Shortly after the end of the second quarter, the SEC released final rules on its third set of reforms for institutional MMFs since 2010. The new reforms included increasing daily and weekly liquidity requirements to 25% and 50%, respectively, and removing the link between gates and fees to weekly liquidity.

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.

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Top 10 U.S. Domiciled 'AAAm' MMFs (Government And Prime) By Assets--Key Statistics

Table 4

S&P Global Ratings 'AAAm' US$ principal stability funds--government
--Portfolio maturity (days)--
PSFR Fund name Net assets WAM (R) WAM (F) Portfolio credit quality 'A-1+' (%)
AAAm Goldman Sachs Money Market Funds - Goldman Sachs Financial Square Government Fund 266,706 31 87 95
AAAm JPMorgan U.S. Government Money Market Fund 257,431 25 57 92
AAAm Fidelity Investments Money Market Government Portfolio 178,211 21 58 98
AAAm Morgan Stanley Institutional Liquidity Funds - Government Portfolio 162,746 18 71 93
AAAm BlackRock Liquidity Funds FedFund 150,889 21 57 92
AAAm Federated Government Obligations Fund 142,531 26 84 100
AAAm JPMorgan 100% U.S. Treasury Securities Money Market Fund 130,570 42 75 100
AAAm Dreyfus Government Cash Management 120,138 24 60 94
AAAm BlackRock Liquidity Funds Treasury Trust Fund 110,630 38 83 100
AAAm State Street Institutional U.S. Government Money Market Portfolio 104,684 22 48 98
PSFR--Principal stability fund rating.

Table 5

S&P Global 'AAAm' US$ principal stability funds--prime
--Portfolio maturity (days)--
PSFR Fund name Net assets WAM (R) WAM (F) Portfolio credit quality 'A-1+' (%)
AAAm JPMorgan Prime Money Market Fund 78,645 27 54 59
AAAm Federated Prime Cash Obligations Fund 50,312 40 72 63
AAAm Texas Cooperative Liquid Assets Securities System (TX CLASS) 22,463 45 80 57
AAAm State Treasury Asset Reserve of Ohio (STAR OHIO) 22,048 37 62 62
AAAm Florida PRIME 21,785 33 80 59
AAAm Connecticut State Treasurer's Short-Term Investment Fund 19,045 41 98 83
AAAm Federated Institutional Prime Obligations 17,345 39 74 62
AAAm Morgan Stanley Institutional Liquidity Funds - Prime Portfolio 17,080 32 72 72
AAAm California Asset Management Trust/Cash Reserve Portfolio 14,798 27 60 50
AAAm State Street Money Market Portfolio 14,778 15 39 70
PSFR--Principal stability fund rating.

This report does not constitute a rating action.

Primary Credit Analyst:Marissa Zuccaro, Englewood + 1 (303) 721 4762;
marissa.zuccaro@spglobal.com
Secondary Contacts:Michael Masih, New York + 1 (212) 438 1642;
michael.masih@spglobal.com
Andrew Paranthoiene, London + 44 20 7176 8416;
andrew.paranthoiene@spglobal.com

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