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U.S. Domestic 'AAAm' Money Market Fund Trends (Fourth-Quarter 2021)

Index Seven-day net yield (%) 30-day net yield (%) WAM (R) (days) Total net assets (bil. $) Credit quality (%) ('A-1+'/'A-1')
S&P Global Ratings 'AAAm' principal stability funds--government 0.02 0.01 36 3,112.6 97/3
S&P Global Ratings 'AAAm' principal stability funds--prime 0.04 0.04 41 365.2 64/36
WAM (R)--Weighted average maturity to reset.

 

Market Comment

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. 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.

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.

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.

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%.

Table 1

'AAAm' Principal Stability Funds Seven-Day Net Yield (%)
Index 20-Dec 21-Mar 21-Jun 21-Sep 21-Dec
S&P Global Ratings 'AAAm' government MMFs 0.02 0.02 0.01 0.01 0.02
S&P Global Ratings 'AAAm' prime MMFs 0.02 0.02 0.01 0.04 0.04
MMF--Money market fund.

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.

With the end of LIBOR on the horizon for overnight, one-month, three-month, six-month, and 12-month USD rates by June 2023, alternative rates may be of greater focus in 2022, especially when the market is seeking credit sensitive or term-focused rates. In 2021, there was some early enthusiasm for alternatives other than the Secured Overnight Financing Rate (SOFR), but that has faded in recent months. For example, the Bloomberg Short Term Bank Yield Index (BSBY) was introduced but didn't see as much activity as some had hoped. In general, there has been lower usage of floating-rate securities, as managers gravitated toward fixed instruments. With rates expected to rise, purchases of floaters may increase and possibly reveal a preferred benchmark in a post-LIBOR world.

Table 2

'AAAm' Principal Stability Funds Weighted Average Maturity (In Days)
Index 20-Dec 21-Mar 21-Jun 21-Sep 21-Dec
S&P Global Ratings 'AAAm' government MMFs 43 42 37 35 36
S&P Global Ratings 'AAAm' prime MMFs 44 46 46 43 41
MMF--Money market funds.

Effective 'A-1+' credit quality remains very strong for U.S. rated MMFs. Government funds maintained heavy weighting in effective 'A-1+' exposure, at 97%. Prime funds decreased effective 'A-1+' exposure very slightly to 64% during the quarter. For the year overall, we observed prime funds move effective 'A-1+' exposure to pre-pandemic levels. Several government funds continued to hold small positions in 'A-2' overnight collateralized repo.

Table 3

'AAAm' Principal Stability Funds 'A-1+' Credit Quality (%)
Index 20-Dec 21-Mar 21-Jun 21-Sep 21-Dec
S&P Global Ratings 'AAAm' government MMFs 95 96 97 97 97
S&P Global Ratings 'AAAm' prime MMFs 68 65 66 65 64
MMF--Money market fund.

Net asset values (NAV per share) for rated funds stayed in a 24 basis point range, between 0.9995 and1.0019 per share.

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

Table 4

S&P Global 'AAAm' USD Principal Stability Funds–Government
--Portfolio maturity (days)--
Rating Fund Name Net assets (mil. $) WAM (R) WAM (F) Portfolio credit quality 'A-1+' (%)
AAAm JPMorgan U.S. Government Money Market Fund 258,928 31 44 91
AAAm Goldman Sachs Money Market Funds - Goldman Sachs Financial Square Government Fund 223,778 9 71 90
AAAm BlackRock Liquidity Funds FedFund 180,808 31 70 92
AAAm Morgan Stanley Institutional Liquidity Funds - Government Portfolio 155,630 14 25 98
AAAm Federated Government Obligations Fund 142,241 36 93 97
AAAm Allspring Government Money Market Fund 139,858 42 99 99
AAAm Fidelity Investments Money Market Government Portfolio 132,736 38 81 98
AAAm Dreyfus Government Cash Management 132,460 25 81 100
AAAm BlackRock Liquidity Funds T-Fund 129,499 29 68 95
AAAm BlackRock Liquidity Funds Treasury Trust Fund 114,302 51 85 100
WAM (R)--Weighted average maturity to reset. WAM (F)--Weighted average maturity final.

Table 5

S&P Global 'AAAm' USD Principal Stability Funds--Prime
--Portfolio maturity (days)--
Rating Fund name Net assets (mil. $) WAM (R) WAM (F) Portfolio credit quality 'A-1+' (%)
AAAm JPMorgan Prime Money Market Fund 69,854 46 60 58
AAAm Florida PRIME 20,306 51 71 59
AAAm Federated Prime Cash Obligations Fund 18,016 45 64 57
AAAm State Treasury Asset Reserve of Ohio (STAR OHIO) 14,960 50 70 64
AAAm Morgan Stanley Institutional Liquidity Funds - Prime Portfolio 14,731 27 71 62
AAAm State Street Money Market Portfolio 12,935 36 54 59
AAAm Connecticut State Treasurer's Short-Term Investment Fund 12,432 34 61 76
AAAm Federated Institutional Prime Obligations 12,236 46 61 57
AAAm Texas Cooperative Liquid Assets Securities System 12,107 46 70 60
AAAm Colorado Local Government Liquid Asset Trust (COLOTRUST PLUS+) 10,879 46 73 64
WAM (R)--Weighted average maturity to reset. WAM (F)--Weighted average maturity final.

This report does not constitute a rating action.

Primary Credit Analysts:Joseph Zimbalist, New York;
joseph.zimbalist@spglobal.com
Marissa Zuccaro, Centennial + 1 (303) 721 4762;
marissa.zuccaro@spglobal.com
Secondary Contact:Andrew Paranthoiene, London + 44 20 7176 8416;
andrew.paranthoiene@spglobal.com

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