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'AAAm' Local Government Investment Pool Trends (First-Quarter 2023)


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'AAAm' Local Government Investment Pool Trends (First-Quarter 2023)

This report does not constitute a rating action.

Index name 7-day net yield (%) 30-day net yield (%) WAM-R (days) WAM-F (days) Total net assets (bil. $) A-1+' : 'A-1' credit quality (%)
S&P Global Ratings ‘AAAm’ government LGIPs 4.70 4.56 17 66 86.6 99:1
S&P Global Ratings ‘AAAm’ prime LGIPs 4.84 4.73 30 69 235.5 66:34
LGIP--Local government investment pool. WAM-R--Weighted average maturity to reset. WAM-F--Weighted average maturity to final.


'AAAm' Local Government Investment Pools

The 'AAAm' local government investment pool (LGIP) trends report shows metrics of U.S.-domiciled LGIPs that seek to maintain principal value ($1.00) and limit exposure to principal losses due to credit risk, as defined in S&P Global Ratings' principal stability fund ratings (PSFR) criteria. The LGIPs featured in this report all conform to our PSFR criteria, as shown in the affirmation of our 'AAAm' ratings during 2022. In our rating analysis, we place emphasis on the net asset value (NAV) per share, 'A-1+' credit quality, weighted average maturity to reset (WAM-R), weighted average maturity to final (WAM-F), net asset trends, and the underlying composition of LGIPs.

LGIPs are present in many U.S. states where, generally, the state treasurer oversees a pooled investment vehicle that operates in a similar way to a money market fund. Typically a cost-effective investment option, LGIPs allow municipalities and public entities to combine their idle cash and operating balances to obtain economies of scale, through a diversified range of investments, to earn an incremental rate of return. Unlike money market funds registered with the SEC (U.S. Securities and Exchange Commission), LGIPs are not regulated by the SEC and therefore not subject to SEC rule 2a-7. However, LGIPs typically benefit from the purview of state statutes, which provide guidelines on LGIPs' investment policy and objective, as well as from the standards and guidance of the Governmental Accounting Standards Board, where standard 79 allows the use of amortized cost to value an LGIP's portfolio assets.

Our LGIP metrics demonstrate the investment practices of 'AAAm' rated LGIPs and those conforming to our PSFR criteria. If an individual LGIP's metrics are below our benchmarks, this may indicate a more conservative approach to investment, while metrics well above our benchmarks may signal a more aggressive approach, albeit still within the range for a 'AAAm' PSFR.

Market Comment

U.S LGIPs' asset levels reached historical highs in the first quarter of 2023, accentuating the benefits of this investment product.   LGIPs with assets collectively exceeding $320 billion follow a prime or government strategy and are rated under our PSFR criteria. Asset flows generally follow cyclical patterns related to funding activities and tax receipts. Over the first quarter of 2023, rated LGIPs following a government strategy (government LGIPs) saw assets increase by 17.8%, while asset growth for rated prime LGIPs was 12.4%. Generally speaking, strong asset growth can be attributed to improving tax receipts and competitive returns over money market funds and bank deposits. In addition, LGIPs absorbed monies from participants receiving federal stimulus funds, a factor that has contributed to recent years' asset growth.

Chart 1


LGIP returns continued to rise in Q1 2023, making the funds more compelling in a rising interest rate environment.  Following several interest rate hikes by the U.S. Federal Reserve Bank (the Fed) during 2022, LGIP seven-day yields broke through the 4% barrier for the first time since the global financial crisis (see table 1). Following the 25 basis-point hike in March, government and prime LGIP seven-day yields continued to rise through the first quarter of 2023, inching closer to 5%. LGIPs now provide a rate of return that can compete with interest on bank deposits.

Table 1

'AAAm' LGIP Seven-Day Net Yield (%)
Index Mar-22 Jun-22 Sep-22 Dec-22 Mar-23
S&P Global Ratings ‘AAAm’ government LGIPs 0.21 1.24 2.77 4.15 4.70
S&P Global Ratings ‘AAAm’ prime LGIPs 0.33 1.38 2.81 4.38 4.84

Managers continued to mitigate price volatility with conservative management, providing a consistent NAV per share.  The NAV per share averaged 0.99972 in the first quarter of 2023, about 22 basis points higher than our lowest NAV threshold of 0.9975 for 'AAAm' PSFRs (see chart 2). We previously observed a decline in LGIP NAVs following the 75-basis-point hike in June, but they remain within the 'AAAm' threshold. Notably though, managers have followed a prudent investment focus, navigating the rapid interest rate moves with measures to reduce portfolio hazards and improve liquidity.

Chart 2


The Fed's interest rate policy steps remain at the forefront when it comes to formulating investment strategy. Recently, volatility in the banking sector and uncertainty regarding the debt ceiling have seen a continuation of high credit quality positioning and a moderate increase in weekly maturing assets. This was especially the case for government-focused LGIPs, which (on average) had 70% of their assets maturing weekly in March 2023, the highest recorded in the last two years. Prime LGIPs have been consistent, with 45% weekly liquidity, an improvement since the rate hikes.

Chart 3


Weighted average maturities, key indicators to interest rate risk, remained conservative in the first quarter of 2023.  The marked decline in 2022 (see table 2 and chart 4) can be attributed to fluctuations in global market conditions caused by geopolitical uncertainty, with the resulting dramatic rise in inflation prompting aggressive actions from the Fed. A further extension of weighted average maturities (WAMs) is likely following the expected rate hike. However, WAMs are unlikely to extend to pre-rate-hike levels due to economic uncertainty.

Table 2

'AAAm' LGIP Weighted Average Maturity (In Days)
Index Mar-22 Jun-22 Sep-22 Dec-22 Mar-23
S&P Global Ratings ‘AAAm’ government LGIPs 31 24 21 13 17
S&P Global Ratings ‘AAAm’ prime LGIPs 36 29 24 26 30

Chart 4


Chart 5


In looking at 2023 and recognizing the nature of the underlying instruments in LGIP portfolios--generally high credit quality ('A-1' or higher; see table 3 and chart 6) government, agency, and bank investments--we cite some of the key takeaways from recent reports: "Singing The (Banking) Blues: Navigating The Current Volatility In The Banking Industry," March 27, 2023, on, and "Economic Outlook U.S. Q2 2023: Still Resilient, Downside Risks Rise," March 27, 2023, published on RatingsDirect.

  • S&P Global's economists now expect full-year U.S. GDP growth at 0.7%, in contrast to the November 2022 forecast of a contraction of 0.1% in 2023.
  • The collapse of Silicon Valley Bank in the first quarter, following a flight of deposits, led to a reassessment of market liquidity and attempts to manage contagion risks across the banking industry.
  • Inflation likely peaked in the third quarter of 2022 and is expected to remain higher than historical levels on continued supply-chain disruptions in certain sectors.
  • The federal funds rate is expected to peak at 5.00%-5.15% by May, but as prices begin to stabilize, the first interest rate cut could occur by mid-2024.

Table 3

'AAAm' LGIP 'A-1+' Credit Quality (%)
Index Mar-22 Jun-22 Sep-22 Dec-22 Mar-23
S&P Global Ratings ‘AAAm’ government LGIPs 99 98 98 99 99
S&P Global Ratings ‘AAAm’ prime LGIPs 66 68 72 67 66
LGIP--Local government investment pool.

Chart 6


Chart 7


Chart 8


Table 4

'AAAm' LGIPs--Top 10 By Assets
Government LGIPs
Principal stability fund rating Local government investment pool Net assets (mil. $) --Portfolio maturity (days)-- 'A-1+' credit quality (%) NAV per share
AAAm TEXPOOL 33,186 17 73 99 0.99990
AAAm North Carolina Capital Management Trust - Government Portfolio 17,843 8 68 100 1.00018
AAAm Texas Short Term Asset Reserve (TexSTAR) Cash Reserve Fund 11,099 12 40 100 1.00005
AAAm New York Cooperative Liquid Assets Securities System (NY CLASS) 9,034 41 78 100 1.00010
AAAm Lone Star Investment Pool - Government Overnight Fund 6,724 15 66 99 1.00021
AAAm New York Liquid Asset Fund - MAX Portfolio 1,904 10 10 100 1.00004
AAAm Texas Cooperative Liquid Assets Securities System (TX CLASS Government) 1,363 20 82 100 1.00001
AAAm New Jersey Asset & Rebate Management Program/Joint Account 1,242 27 91 100 1.00006
AAAm Colorado Local Government Liquid Asset Trust (COLOTRUST PRIME) 739 18 76 100 1.00000
AAAm Nebraska Liquid Asset Fund 625 26 91 97 1.00005
Prime LGIPs
Principal stability fund rating Local government investment pool Net assets (mil. $) --Portfolio maturity (days)-- 'A-1+' credit quality (%) NAV per share
AAAm Texas Cooperative Liquid Assets Securities System (TX CLASS) 22,905 35 67 62 0.99988
AAAm Florida PRIME 22,436 23 79 61 0.99984
AAAm State Treasury Asset Reserve of Ohio (STAR OHIO) 21,841 37 66 62 0.99983
AAAm Connecticut State Treasurer's Short-Term Investment Fund 19,201 38 88 81 1.00073
AAAm California Asset Management Trust/Cash Reserve Portfolio 12,892 27 58 54 0.99982
AAAm TEXPOOL Prime 12,482 24 66 59 0.99982
AAAm Colorado Local Government Liquid Asset Trust (COLOTRUST PLUS+) 11,951 32 70 62 0.99992
AAAm Local Government Investment Cooperative 10,568 33 59 69 0.99991
AAAm Virginia Local Government Investment Pool 10,287 49 97 73 0.99983
AAAm Maryland Local Government Investment Pool 9,775 30 91 93 1.00015
Source: S&P Global Ratings.

Related Research

Primary Credit Analyst:Kara Wachsmann, Englewood + 303 721 4547;
Secondary Contacts:Michael Masih, New York + 1 (212) 438 1642;
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