| 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 | 5.04 | 5.02 | 24 | 77 | 80.8 | 99:1 | ||||||||
| S&P Global Ratings ‘AAAm’ prime LGIPs | 5.22 | 5.19 | 36 | 74 | 244 | 64:36 | ||||||||
| LGIP--Local government investment pool. WAM-R--Weighted average maturity to reset. WAM-F--Weighted average maturity to final. | ||||||||||||||
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. The LGIPs featured in this report all conform to our principal stability fund ratings (PSFR) criteria.
In our rating analysis, we emphasize 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. For more, see the "'AAAm' Local Government Investment Pools" section at the end of this report.
U.S. LGIPs' Assets Plateaued In The Second Quarter Following Strong Growth
Prime LGIPs' assets rose slightly in the second quarter, to $244 billion, from $235 billion the prior quarter, while government strategies saw outflows of $6 billion to finish the second quarter at $81 billion. Together, these equate to a 0.9% increase in total prime and government assets. (Prime LGIPs are those that have the ability to invest in corporate credit securities--similar to prime money market funds.)
Outflows and slower growth are common in the second quarter owing to the cyclical nature of LGIPs. But overall asset growth in 2023 has been robust, generally attributed to improving tax receipts and competitive returns over money market funds and bank deposits.
Chart 1
LGIPs Are Providing A Competitive Rate Of Return Relative To Bank Deposits And Money Market Funds
Following the U.S. Federal Reserve's 25-basis-point interest rate hike in May 2023, LGIP seven-day yields broke through the 5% barrier (see table 1). In our view, LGIPs continue to provide a rate of return that can compete with institutional money market funds and interest on bank deposits.
Table 1
| 'AAAm' LGIPs' seven-day net yield (%) | |||||
|---|---|---|---|---|---|
| Index | Jun-22 | Sep-22 | Dec-22 | Mar-23 | Jun-23 |
| S&P Global Ratings ‘AAAm’ government LGIPs | 1.24 | 2.77 | 4.15 | 4.7 | 5.04 |
| S&P Global Ratings ‘AAAm’ prime LGIPs | 1.38 | 2.81 | 4.38 | 4.84 | 5.22 |
Conservative Management Continued To Mitigate Price Volatility, Providing A Consistent NAV Per Share
The net asset value (NAV) per share averaged 0.99988 in the second quarter of 2023, about 23 basis points higher than our lowest NAV threshold of 0.9975 for 'AAAm' rated PSFRs (see chart 2). Notably though, managers have continued to follow a prudent investment focus, navigating the rapid interest rate moves with measures to reduce portfolio hazards and improve liquidity.
Chart 2
LGIP managers continue to concentrate on the Fed's interest rate policy when developing investment strategy. Recently, uncertainty around the debt ceiling faded as the limit was raised through early 2025. Banking sector volatility still raises concerns for investors, leading to a continuation of high credit quality positioning. Government-focused LGIPs, on average, had 68% of their assets maturing weekly in June 2023. Considering maturity extension, prime LGIPs experienced a slight decline in weekly liquidity, dropping to 40% from the previous quarter's 45%.
Chart 3
Weighted Average Maturities Started To Increase In The Second Quarter
The increase in weighted average maturities--a key indicator of interest rate risk--can be attributed to managers predicting a nearing conclusion to rate hikes (see table 2 and chart 4). On average, government-focused LGIPs had a weighted average maturity (WAM) of 24 days in June, up from 17 days in the first quarter. Prime LGIPs averaged a 36-day WAM in June, an increase from 30 days.
The rise is noteworthy, especially when considering the substantial WAM declines in 2022 on the back of a dramatic increase in inflation prompting aggressive actions from the Fed. When rates peak, a further extension of WAMs is likely.
Table 2
| 'AAAm' LGIPs' weighted average maturity (in days) | |||||
|---|---|---|---|---|---|
| Index | Jun-22 | Sep-22 | Dec-22 | Mar-23 | Jun-23 |
| S&P Global Ratings ‘AAAm’ government LGIPs | 24 | 21 | 13 | 17 | 24 |
| S&P Global Ratings ‘AAAm’ prime LGIPs | 29 | 24 | 26 | 30 | 36 |
Chart 4
Chart 5
Economic Updates
The underlying instruments in LGIP portfolios are generally high credit quality ('A-1' or higher) government, agency, and bank investments (see table 3 and chart 6). Recognizing this, we cite some of the key takeaways from recent reports: "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.
- S&P Global Ratings' economists do not expect any more rate hikes in 2023, which is consistent with their forecast for below-potential economic growth.
- The U.S. economy maintains its resilience of the past few quarters, despite sharp rises in policy rated and standard recession indicators.
- S&P Global Ratings' economists expect real GDP growth will slow to under 1.0% in the second half of the year, half the rate expected in the second quarter, amid a material and broad-based decline in domestic demand growth.
Table 3
| 'AAAm' LGIPs' 'A-1+' credit quality (%) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Index | Jun-22 | Sep-22 | Dec-22 | Mar-23 | Jun-23 | |||||||
| S&P Global Ratings ‘AAAm’ government LGIPs | 98 | 98 | 99 | 99 | 99 | |||||||
| S&P Global Ratings ‘AAAm’ prime LGIPs | 68 | 72 | 67 | 66 | 64 | |||||||
| LGIP--Local government investment pool. | ||||||||||||
Chart 6
Chart 7
Chart 8
Table 4
| 'AAAm' LGIPs--top 10 by assets | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Principal stability fund rating | Local government investment pool | Net assets (mil. $) | --Portfolio maturity (days)-- | 'A-1+' credit quality (%) | NAV per share | |||||||||
| WAM-R | WAM-F | |||||||||||||
| Government LGIPs | ||||||||||||||
| AAAm | TEXPOOL | 30,153 | 24 | 91 | 100 | 0.99990 | ||||||||
| AAAm | North Carolina Capital Management Trust - Government Portfolio | 17,787 | 23 | 75 | 100 | 1.00018 | ||||||||
| AAAm | Texas Short Term Asset Reserve (TexSTAR) Cash Reserve Fund | 10,495 | 22 | 49 | 100 | 1.00005 | ||||||||
| AAAm | New York Cooperative Liquid Assets Securities System (NY CLASS) | 8,622 | 32 | 73 | 100 | 1.00010 | ||||||||
| AAAm | Lone Star Investment Pool - Government Overnight Fund | 5,574 | 23 | 96 | 97 | 1.00021 | ||||||||
| AAAm | Pennsylvania School District Liquid Asset Fund - Max Series | 2,414 | 22 | 30 | 100 | 1.00004 | ||||||||
| AAAm | Texas Cooperative Liquid Assets Securities System (TX CLASS Government) | 1,371 | 26 | 83 | 100 | 1.00001 | ||||||||
| AAAm | New York Liquid Asset Fund - MAX Portfolio | 1,323 | 17 | 18 | 100 | 1.00006 | ||||||||
| AAAm | New Jersey Asset & Rebate Management Program/Joint Account | 997 | 29 | 91 | 93 | 1.00000 | ||||||||
| AAAm | Nebraska Liquid Asset Fund | 768 | 28 | 91 | 96 | 1.00005 | ||||||||
| Prime LGIPs | ||||||||||||||
| AAAm | Texas Cooperative Liquid Assets Securities System (TX CLASS) | 22,463 | 45 | 80 | 57 | 0.99985 | ||||||||
| AAAm | State Treasury Asset Reserve of Ohio (STAR OHIO) | 22,048 | 37 | 62 | 62 | 0.99981 | ||||||||
| AAAm | Florida PRIME | 21,785 | 33 | 80 | 59 | 0.99991 | ||||||||
| AAAm | Connecticut State Treasurer's Short-Term Investment Fund | 19,045 | 41 | 98 | 83 | 0.99922 | ||||||||
| AAAm | California Asset Management Trust/Cash Reserve Portfolio | 14,798 | 27 | 60 | 50 | 0.99989 | ||||||||
| AAAm | Colorado Local Government Liquid Asset Trust (COLOTRUST PLUS+) | 13,774 | 45 | 83 | 63 | 0.99984 | ||||||||
| AAAm | Virginia Local Government Investment Pool | 12,277 | 51 | 95 | 73 | 0.99987 | ||||||||
| AAAm | TEXPOOL Prime | 11,902 | 32 | 78 | 61 | 0.99982 | ||||||||
| AAAm | Local Government Investment Cooperative | 10,089 | 38 | 72 | 55 | 0.99981 | ||||||||
| AAAm | West Virginia Money Market Pool | 9,809 | 28 | 67 | 55 | 0.99974 | ||||||||
| Source: S&P Global Ratings. | ||||||||||||||
'AAAm' Local Government Investment Pools
The 'AAAm' 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' PSFR criteria.
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, 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. Metrics well above our benchmarks may signal a more aggressive approach, albeit still within the range for a 'AAAm' PSFR.
Related Research
- Strong U.S. Jobs Report Makes A Rate Hike All But Certain In July, July 13, 2023
- Credit Conditions North America Q3 2023: Risks vs. Resilience, June 27, 2023
- Economic Outlook U.S. Q3 2023: A Sticky Slowdown Means Higher For Longer, June 26, 2023
- U.S. Banking Sector Risk Should Remain Manageable While Headwinds Persist For Certain Banks, May 15, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Kara Wachsmann, Englewood + 303 721 4547; kara.wachsmann@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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