'AAAm' Money Market Fund Indicators

S&P Global Ratings' 'AAAm' MMF indicators are metrics of U.S. domestic managed funds that seek to maintain principal value and limit exposure to principal losses due to credit risk, as defined in our principal stability fund ratings criteria. These MMF indicators provide a benchmarking tool of the 'A-1+' credit quality, portfolio composition, maturity distribution, net asset movements, and yields of 'AAAm' principal stability rated funds.

The MMF indicators demonstrate the investment practices of funds conforming to the principal stability fund rating criteria. An individual fund's metrics below that of the S&P Global Ratings' 'AAAm' MMF indicators may indicate a more conservative approach to investment, while a fund's risk metrics well above the average may signal a more aggressive approach, albeit undertaken within the 'AAAm' principal stability fund rating constraints.

Money Market Fund Assets Reach New Heights

Assets in MMFs grew to record levels once again in the fourth quarter. Rated government and prime MMFs both increased roughly 3% to $3.3 trillion and $263 billion, respectively. Annual growth in 2023 was higher than in prior years, mainly because cash was a highly attractive asset class and banking stress in the U.S. drove investors to diversify their liquidity sources. Rated government MMF assets grew 18% and prime MMF assets rose 25% during the year.

Chart 1

Yields for rated MMFs didn't move quarter-over-quarter for the first time since 2021. However, over the course of the year, yields increased approximately 140 basis points (bps) for rated government and prime MMFs. Quarter-end yields ranged from 4.4% to 5.4% for rated government funds and 5.3% to 5.6% for prime funds.

Table 1

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After four interest rate hikes earlier in 2023, the Federal Reserve didn't raise rates in the fourth quarter. With recessionary signals failing to manifest, portfolio managers are now turning their attention to a potential policy change to rate cuts. Based on current data, S&P Global Ratings economists expect a pivot to cutting in mid-2024, with the policy rate landing at 4.6% by the end of the year. (see "Economic Outlook: U.S. Q1 2024: Cooling Off But Not Breaking," published Nov. 27, 2023).

Credit In Context: Exposures In Money Markets Funds

Treasury bill issuance remained robust in the fourth quarter. Based on Securities Industry and Financial Markets Assn. (SIFMA) data, bill to outstanding debt moved slightly higher than the Treasury Borrowing Advisory Committee's 15%-20% target. Managers of rated government funds absorbed much of this issuance. Average Treasury bill exposure increased to 32% from 25% over the quarter. Consequently, repurchase agreements (repo) purchases declined, with average weightings reduced to 44% from 55%. This was also reflected in use of the Fed's Reverse Repo Program (RRP). According to the St. Louis Fed's data, RRP volumes fell below $1 trillion during the quarter.

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Rated prime funds also purchased a small portion of the Treasury bill issuance, with average exposure increasing to approximately 2% throughout the fourth quarter. Managers bought additional asset-backed commercial paper, of which there was higher net issuance during the last quarter relative to the prior three quarters, based on SIFMA data. Weightings in repo, certificates of deposits (CDs), and commercial paper (CP) were stable. However, managers moved into fixed CDs and CP as floating-rate positions matured. The most notable allocation change for the year overall was a slow shift out of overnight bank deposits and into CDs, reflecting managers' intentions to extend maturities and add yield. (See Chart 6)

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Earlier in 2023, effective 'A-1+' credit quality of rated government funds and especially prime funds migrated downward as managers invested further out the curve. In the fourth quarter, effective 'A-1+' credit quality for rated government and prime funds stabilized, with essentially no movement quarter-over-quarter.

Table 2

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MMF Managers Not Finished Extending

With greater conviction about the direction of interest rates, managers further extended the maturity profiles of rated government and prime MMFs by rolling off floating-rate positions and purchasing longer-dated fixed tenors. We previously predicted that weighted average maturities (WAMs) could extend rapidly if Fed rate policy reversed. The Fed hasn't begun cutting rates, but portfolio managers of rated MMFs increased WAM 13 days for government funds and eight days for prime funds, demonstrating their view that the hiking cycle is likely over. Extension in rated government funds exceeded that of prime funds in the fourth quarter, but prime strategies began extending earlier in the year relative to government funds.

Table 3

Chart 9

Stability In Money Market Funds

The distribution of NAV per share for rated MMFs remained in a tight range. NAV movement of rated funds was biased towards the upside on a quarter-over-quarter basis. At quarter-end, the range for rated fund NAVs was 0.9994-1.0010.

Chart 10

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

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