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 Remained Unchanged In The Third Quarter, Maintaining A Steady Plateau
Both government and prime LGIPs held steady around $80 billion and $245 billion in the third quarter, mirroring their second quarter asset levels. (Prime LGIPs are those with the ability to invest in corporate credit securities--similar to prime money market funds.)
Outflows and/or slower growth are common in the second and third quarters owing to the cyclical nature of LGIPs. Conversely, we anticipate LGIP inflows in the fourth quarter. Our view is largely guided by historical trends as LGIPs typically gain assets in November and December. Year-end inflows are primarily attributed to seasonal tax revenue.
Chart 1
LGIPs Continue To Offer A Competitive Rate Of Return
Following the U.S. Federal Reserve's 25-basis-point interest rate hike in July 2023, LGIP seven-day yields neared 5.5% (see table 1), and the 30-day yields broke through the 5% barrier. In our view, LGIPs maintain a competitive edge, net of fees, as they continue to outpace institutional money market funds and remain competitive with bank deposits.
Table 1
| AAAm' LGIP seven-day net yield (%) | |||||
|---|---|---|---|---|---|
| Index | Sep-22 | Dec-22 | Mar-23 | Jun-23 | Sep-23 |
| S&P Global Ratings ‘AAAm’ government LGIPs | 2.77 | 4.15 | 4.7 | 5.04 | 5.3 |
| S&P Global Ratings ‘AAAm’ prime LGIPs | 2.81 | 4.38 | 4.84 | 5.22 | 5.48 |
NAV Stability
The net asset value (NAV) per share averaged 0.99996 in the third quarter of 2023, compared with 0.99998 in the second quarter. The third quarter average is about 25 basis points higher than our lowest NAV threshold of 0.9975 for 'AAAm' rated PSFRs (see chart 2). Rated LGIP managers have continued to follow a conservative investment focus, maintaining liquidity, and high quality investments, even with asrate hikes are expected to end soon.
Chart 2
LGIP manager strategy is typically influenced by the direction of rates, combined with the shape of the yield curve, among other factors. As such, we note that rated LGIP managers increased maturities modestly, implying a nearing end to rate hikes. Although managers have extended maturities, further lengthening of maturities is constrained by the inverted yield curve (see chart 9). Credit quality continues to remain strong, despite increased maturities. Government-focused LGIPs, on average, had 64% of their assets maturing weekly in September 2023, falling from 68% the prior quarter. Prime LGIPs also have had a subtle decline in weekly liquidity, dropping to 39% from the previous quarter's 40%.
Chart 3
Weighted Average Maturities Steadily Increased Throughout The Third Quarter
The increase in weighted average maturities--a key indicator of interest rate risk--can be attributed to managers predicting that rate hikes are nearing an end (see table 2 and chart 4). On average, government focused LGIPs had a weighted average maturity (WAM) of 27 days in September, up from 24 days in the second quarter. Prime LGIPs averaged a 41-day WAM in September, an increase from 36 days. Given historical patterns, there is a likelihood of a modest increase in the extension of WAMs as fourth quarter inflows materialize. However, limited value in extending may serve as a countervailing factor.
Table 2
| 'AAAm' LGIP Weighted Average Maturity (In Days) | |||||
|---|---|---|---|---|---|
| Index | Sep-22 | Dec-22 | Mar-23 | Jun-23 | Sep-23 |
| S&P Global Ratings ‘AAAm’ government LGIPs | 21 | 13 | 17 | 24 | 27 |
| S&P Global Ratings ‘AAAm’ prime LGIPs | 24 | 26 | 30 | 36 | 41 |
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: "Credit Conditions North America Q4 2023: Shift to Low Gear," Sept.26, 2023, and "Economic Outlook U.S Q4 2023: Slowdown Delayed, Not Averted," Sept. 25, 2023.
- S&P Global Ratings' economists forecast one more rate hike from the Federal Reserve and don't expect the central bank to lower its policy rate until mid-2024, at the earliest.
- U.S Economic data has been stronger than expected, suggesting a slowdown will be pushed into 2024.
- S&P Global Ratings' economists expect the economy to expand 2.3% this year, and growth to decline to 1.3% for 2024, suggesting a gradual recovery.
- Defaults are rising, and credit conditions could erode further. In 2023, most defaults have been first-time defaulters, or those who last defaulted years ago.
Table 3
| 'AAAm' LGIP 'A-1+' Credit Quality (%) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Index | Sep-22 | Dec-22 | Mar-23 | Jun-23 | Sep-23 | |||||||
| S&P Global Ratings ‘AAAm’ government LGIPs | 98 | 99 | 99 | 99 | 99 | |||||||
| S&P Global Ratings ‘AAAm’ prime LGIPs | 72 | 67 | 66 | 64 | 64 | |||||||
| LGIP--Local government investment pool. | ||||||||||||
Chart 6
Chart 7
Chart 8
Chart 9
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 | |||||||||
| WAM-R | WAM-F | |||||||||||||
| AAAm | TEXPOOL | 28,793 | 27 | 92 | 100 | 0.99984 | ||||||||
| AAAm | North Carolina Capital Management Trust - Government Portfolio | 18,267 | 23 | 65 | 100 | 1.00009 | ||||||||
| AAAm | Texas Short Term Asset Reserve (TexSTAR) Cash Reserve Fund | 10,064 | 31 | 58 | 100 | 0.99979 | ||||||||
| AAAm | New York Cooperative Liquid Assets Securities System (NY CLASS) | 8,586 | 39 | 82 | 100 | 1.00006 | ||||||||
| AAAm | Lone Star Investment Pool - Government Overnight Fund | 5,479 | 21 | 97 | 98 | 1.00014 | ||||||||
| AAAm | Pennsylvania School District Liquid Asset Fund - Max Series | 4,002 | 26 | 27 | 100 | 0.99995 | ||||||||
| AAAm | Texas Cooperative Liquid Assets Securities System (TX CLASS Government) | 1,303 | 22 | 70 | 100 | 0.99988 | ||||||||
| AAAm | New Jersey Asset & Rebate Management Program/Joint Account | 1,166 | 31 | 89 | 100 | 1.00001 | ||||||||
| AAAm | New York Liquid Asset Fund - MAX Portfolio | 1,117 | 38 | 28 | 100 | 0.99999 | ||||||||
| AAAm | Nebraska Liquid Asset Fund | 788 | 32 | 86 | 100 | 0.99997 | ||||||||
| Prime LGIPs | ||||||||||||||
| 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 | |||||||||||||
| AAAm | State Treasury Asset Reserve of Ohio (STAR OHIO) | 22,211 | 46 | 66 | 64 | 1.00003 | ||||||||
| AAAm | Texas Cooperative Liquid Assets Securities System (TX CLASS) | 21,576 | 49 | 72 | 58 | 0.99997 | ||||||||
| AAAm | Florida PRIME | 19,979 | 35 | 75 | 55 | 1.00006 | ||||||||
| AAAm | Connecticut State Treasurer's Short-Term Investment Fund | 17,965 | 40 | 87 | 84 | 0.99996 | ||||||||
| AAAm | California Asset Management Trust/Cash Reserve Portfolio | 14,832 | 39 | 68 | 58 | 0.99994 | ||||||||
| AAAm | Colorado Local Government Liquid Asset Trust (COLOTRUST PLUS+) | 13,436 | 49 | 78 | 56 | 0.99999 | ||||||||
| AAAm | TEXPOOL Prime | 12,532 | 45 | 78 | 59 | 0.99998 | ||||||||
| AAAm | Maryland Local Government Investment Pool | 11,341 | 44 | 64 | 81 | 1.00002 | ||||||||
| AAAm | Virginia Local Government Investment Pool | 10,829 | 45 | 84 | 71 | 1.00002 | ||||||||
| AAAm | Local Government Investment Cooperative | 10,433 | 43 | 84 | 55 | 1.00004 | ||||||||
| 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 similarly 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
- Credit Conditions North America Q4 2023: Shift to Low Gear, Sept. 26, 2023
- Economic Outlook U.S. Q4 2023: Slowdown Delayed, Not Adverted, Sept. 25, 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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