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


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


Market Comment

The first quarter of 2023 was highly eventful for MMFs. In light of the pockets of stress in the U.S. banking sector, many investors sought to diversify their liquidity and subsequently moved assets into MMFs. Rated government MMF assets increased 8%, reaching $3.1 trillion, a high point since S&P Global has been rating MMFs. Prime MMF assets increased 10%, ending the first quarter at $460 billion. As the dust settles following the banking sector upheaval, we estimate that a portion of these inflows may move back to banks, however we expect some degree of stickiness to these MMF assets given the lag of bank deposit rates.

Yields saw sustained growth throughout the first quarter. The seven-day and 30-day net yields for government funds increased to 4.42% and 4.30%, respectively, while the seven-day and 30-day net yield for prime funds reached 4.58% and 4.46%, respectively. This trend may continue as the Federal Reserve (Fed) seeks to achieve its policy goals, but we anticipate the rapid interest rate trajectory to slow with the expected peaking of rates.

The Fed has already slowed the pace of rate hikes by only raising the federal funds rate 25 basis points (bps) in February and March, rather than the 50 bps to 75 bps we commonly saw last year. The federal funds rate is now 4.75%-5.00%, and S&P Global economists still expect it to peak at 5.00%-5.15% in May 2023 (see "Economic Outlook U.S. Q2 2023: Still Resilient, Downside Risks Rise," March 27, 2023). Market participants are eager for greater clarity on the timing of a potential recession and Fed rate cuts, with some predicting cuts as early as this year while S&P Global economists expect the first rate cut in mid-2024.

Table 1

'AAAm' principal stability funds seven-day net yield (%)
Index Mar. 2022 Jun. 2022 Sep. 2022 Dec. 2022 Mar. 2023
S&P Global Ratings 'AAAm' government MMFs 0.15 1.1 2.64 3.88 4.42
S&P Global Ratings 'AAAm' prime MMFs 0.26 1.27 2.75 4.12 4.58
MMF--Money market fund.

The Fed's reverse repo program (RRP) remained a popular tool for government funds both because of the relatively high offering rate and inflows into MMFs. However, repo exposure in government funds decreased quarter over quarter for the first time in more than a year. The decline coincided with an increase in agency exposure after Federal Home Loan Bank (FHLB) issuance spiked in response to banks seeking additional funding in March. Average agency exposure in government funds increased to 12% from 8% over the quarter. Allocation to Treasury bills increased minimally while average exposure to Treasury notes decreased to below 2%. Persistent limited bill supply and lingering concerns over the U.S. debt ceiling were at least partial factors.

Prime fund managers deployed recent inflows into overnight repo, including the Fed's RRP. The choice to use repo may reflect these managers intentionally reinforcing liquidity given the uncertain longevity of recent inflows. Prime funds also purchased commercial deposits and participated in the higher FHLB issuance, buying small amounts of agency bonds. Weightings in bank deposits, corporate bonds, and asset-backed commercial paper were lower.

Managers of government and prime strategies generally maintained short maturity profiles relative to historical records but extended them slightly during the quarter, citing opportunities further along the short end of the curve. Weighted average maturities (WAMs) for government funds increased by one day. On the prime side, WAMs increased by four days. Signs that the Fed is slowing rate hikes and possibly pausing altogether in the near future may encourage managers to further extend maturities.

Table 2

'AAAm' principal stability funds weighted average maturity (in days)
Index Mar. 2022 Jun. 2022 Sep. 2022 Dec. 2022 Mar. 2023
S&P Global Ratings 'AAAm' government MMFs 32 27 19 15 16
S&P Global Ratings 'AAAm' prime MMFs 31 24 19 22 26
MMF--Money market funds.

Effective 'A-1+' credit quality was stable for government and prime funds over the quarter, reflecting an emphasis on the high underlying credit quality of investments to aid principal stability.

Table 3

'AAAm' principal stability funds 'A-1+' credit quality (%)
Index Mar. 2022 Jun. 2022 Sep. 2022 Dec. 2022 Mar. 2023
S&P Global Ratings 'AAAm' government MMFs 98 98 98 97 97
S&P Global Ratings 'AAAm' prime MMFs 64 67 70 66 67
MMF--Money market fund.

The distribution of net asset values (NAV per share) for funds continued to narrow, with several funds' NAVs migrating above 0.9995. At quarter-end, nearly all fund NAVs were above 0.9995.

Despite their generally majority holdings in banking entities, we observed no significant negative knock-on effects from concerns over the banking sector in rated MMFs, and all rated funds remained within our metrics for 'AAAm' PSFRs. At this time, S&P Global bank analysts view the overall banking sector as resilient, especially considering the Fed's robust tools, including the new bank term funding program (see "The Fed’s Plan for U.S. Banks Should Reduce Contagion Risk," March 13, 2023). Looking ahead, attention will remain on banking sector health and highly anticipated U.S. MMF reforms, which are yet to be finalized.

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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)--
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 266,792 21 94 97
AAAm JPMorgan U.S. Government Money Market Fund 226,545 10 59 92
AAAm Fidelity Investments Money Market Government Portfolio 159,771 7 55 99
AAAm Federated Government Obligations Fund 149,975 21 84 96
AAAm Morgan Stanley Institutional Liquidity Funds - Government Portfolio 146,194 16 64 95
AAAm BlackRock Liquidity Funds FedFund 136,543 22 39 99
AAAm Dreyfus Government Cash Management 128,259 10 65 95
AAAm JPMorgan 100% U.S. Treasury Securities Money Market Fund 118,542 38 69 100
AAAm BlackRock Liquidity Funds Treasury Trust Fund 102,299 28 62 100
AAAm Goldman Sachs Money Market Funds - Goldman Sachs Financial Square Treasury Instruments Fund 94,831 41 100 100
PSFR--Prime stability fund rating. 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)--
PSFR Fund name Net assets WAM (R) WAM (F) Portfolio credit quality 'A-1+' (%)
AAAm JPMorgan Prime Money Market Fund 67,826 22 50 64
AAAm Federated Prime Cash Obligations Fund 43,344 20 67 65
AAAm Texas Cooperative Liquid Assets Securities System (TX CLASS) 22,905 35 67 62
AAAm Florida PRIME 22,436 23 79 61
AAAm State Treasury Asset Reserve of Ohio (STAR OHIO) 21,841 37 66 62
AAAm Connecticut State Treasurer's Short-Term Investment Fund 19,201 38 88 82
AAAm Morgan Stanley Institutional Liquidity Funds - Prime Portfolio 17,113 20 36 75
AAAm Western Asset Institutional Liquid Reserves 16,023 26 70 53
AAAm Federated Institutional Prime Obligations 15,022 21 66 62
AAAm State Street Money Market Portfolio 12,989 12 42 71
PSFR--Prime stability fund rating. WAM (R)--Weighted average maturity to reset. WAM (F)--Weighted average maturity final.

This report does not constitute a rating action.

Primary Credit Analyst:Marissa Zuccaro, Englewood + 1 (303) 721 4762;
Secondary Contact:Andrew Paranthoiene, London + 44 20 7176 8416;

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