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 Higher From Seasonal Flows
Both government and prime LGIPs' assets under management increased during the fourth quarter, which is typical for the season. Seasonal inflows at year-end are common among LGIPs because the participants receive tax revenues at the beginning of the quarter. Through the end of the quarter, government funds increased $7.8 billion, totaling $88.7 billion, and prime funds increased by $13.9 billion to $256.8 billion. We also note that like prime money market funds, prime LGIPs can invest in corporate credit securities.
Chart 1
LGIPs Continue To Offer A Competitive Rate Of Return
LGIP yields have increased in conjunction with the U.S. Federal Reserve's hikes during 2023 and remained relatively stable through the year-end policy rate pause (see table 1). LGIPs are likely to remain competitive with institutional money market funds and bank deposits if the economic outlook and corresponding policy rate level continues to remain uncertain through the first half of 2024.
Table 1
| 'AAAm' LGIP seven-day net yield (%) | |||||
|---|---|---|---|---|---|
| Index | Dec-22 | Mar-23 | Jun-23 | Sep-23 | Dec-23 |
| S&P Global Ratings ‘AAAm’ government LGIPs | 4.15 | 4.70 | 5.04 | 5.30 | 5.32 |
| S&P Global Ratings ‘AAAm’ prime LGIPs | 4.38 | 4.84 | 5.22 | 5.48 | 5.49 |
NAV Stability Trends Higher Again
The average net asset value (NAV) per share increased above 1.00 to 1.00018 at the end of the fourth quarter, which is well above our minimum threshold of 0.9975 for 'AAAm' rated PSFRs (see chart 2). This is a trending improvement on the heels of the prior year's policy rate hikes and the current plateau that began in July. Additionally, credit quality has remained stable, and rated LGIP managers continued to focus on conservative investments, maintaining liquidity and high-quality investments. Apart from factors like credit quality, LGIP managers position portfolios for the level of rates.
Chart 2
Chart 3
Weighted Average Maturities Keep Rising
Managers continued to expect a plateauing of the policy rate hiking cycle through the end of the quarter. Accordingly, increases in weighted average maturities (WAM) have continued to trend higher from much lower levels during the trailing four quarters, with WAMs finishing the fourth quarter at 36 days and 46 days for government and prime funds, respectively. Much of the maturity extension in government funds can be attributed to reallocation from repurchase agreement securities into Treasuries, and the continuing downward trend of agency floater holdings.
Our WAM index for prime funds increased by five days, quarter-over-quarter, and is 20 days higher from the prior year's end. The government funds WAM index increased even more notably, ending the quarter higher by 11 days, three times more than at the end of 2022 (see table 2 and chart 4). We note that further maturity extension will be meaningfully affected by how much monetary tightening further deters aggregate consumption. Market participants are uncertain on the expected number range and timing of potential rate cuts.
Table 2
| 'AAAm' LGIP weighted average maturity (In days) | |||||
|---|---|---|---|---|---|
| Index | Dec-22 | Mar-23 | Jun-23 | Sep-23 | Dec-23 |
| S&P Global Ratings ‘AAAm’ government LGIPs | 13 | 17 | 24 | 27 | 36 |
| S&P Global Ratings ‘AAAm’ prime LGIPs | 26 | 30 | 36 | 41 | 46 |
Chart 4
Chart 5
Economic Updates
LGIP portfolios typically hold high credit quality ('A-1' or higher) government, agency, and bank investments (see table 3 and chart 6). Accordingly, we cite some of the key takeaways from recent reports: "Credit Conditions North America Q1 2024: A Cluster of Stresses," Nov. 28, 2023, and "Economic Outlook U.S. Q1 2024: Cooling Off But Not Breaking," Nov. 27,2023.
- As normalization in the product and labor markets continues, disinflation will endure, albeit unevenly. S&P's economists continued to think that the Federal Reserve would hike federal funds rate by another 25 basis points (bps; likely December) before cuts start in mid-2024.
- S&P Global Ratings now expects the U.S. economy to expand 1.5% in 2024 on an annual average basis (up from 1.3% in our September forecast) and 1.4% in 2025 (unchanged from the September forecast), before converging to the longer-run sustainable growth of 1.8% in 2026.
- Credit stresses are growing, and borrowers will need to adjust to a new playing field in which financing conditions could become even tighter.
- The costs of debt service and/or refinancing could be overly burdensome, especially for lower-rated borrowers.
Table 3
| 'AAAm' LGIP 'A-1+' credit quality (%) | |||||
|---|---|---|---|---|---|
| Index | Dec-22 | Mar-23 | Jun-23 | Sep-23 | Dec-23 |
| S&P Global Ratings ‘AAAm’ government LGIPs | 99 | 99 | 99 | 99 | 99 |
| S&P Global Ratings ‘AAAm’ prime LGIPs | 67 | 66 | 64 | 64 | 64 |
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 | |
| WAM-R | WAM-F | |||||
| AAAm | TEXPOOL | 31,478 | 37 | 90 | 100 | 0.99997 |
| AAAm | North Carolina Capital Management Trust - Government Portfolio | 20,056 | 26 | 74 | 100 | 1.00012 |
| AAAm | New York Cooperative Liquid Assets Securities System (NY CLASS) | 10,767 | 42 | 89 | 100 | 1.00006 |
| AAAm | Texas Short Term Asset Reserve (TexSTAR) Cash Reserve Fund | 10,341 | 47 | 87 | 100 | 1.00002 |
| AAAm | Lone Star Investment Pool - Government Overnight Fund | 6,300 | 41 | 103 | 100 | 1.00021 |
| AAAm | Pennsylvania School District Liquid Asset Fund - Max Series | 3,170 | 35 | 39 | 100 | 1.00015 |
| AAAm | New Jersey Asset & Rebate Management Program/Joint Account | 1,694 | 42 | 86 | 100 | 1.00016 |
| AAAm | New York Liquid Asset Fund - MAX Portfolio | 1,566 | 43 | 43 | 100 | 1.00023 |
| AAAm | Texas Cooperative Liquid Assets Securities System (TX CLASS Government) | 1,357 | 22 | 75 | 100 | 1.00011 |
| AAAm | Colorado Local Government Liquid Asset Trust (COLOTRUST PRIME) | 666 | 17 | 72 | 100 | 1.00010 |
| 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 | Florida PRIME | 28,094 | 40 | 69 | 56 | 1.00042 |
| AAAm | Texas Cooperative Liquid Assets Securities System (TX CLASS) | 21,359 | 52 | 78 | 61 | 1.00016 |
| AAAm | State Treasury Asset Reserve of Ohio (STAR OHIO) | 19,589 | 45 | 59 | 63 | 1.00036 |
| AAAm | California Asset Management Trust/Cash Reserve Portfolio | 17,667 | 49 | 67 | 54 | 1.00021 |
| AAAm | Connecticut State Treasurer's Short-Term Investment Fund | 16,482 | 44 | 90 | 78 | 1.00015 |
| AAAm | TEXPOOL Prime | 13,390 | 42 | 65 | 64 | 1.00042 |
| AAAm | Virginia Local Government Investment Pool | 12,726 | 57 | 82 | 71 | 1.00020 |
| AAAm | Maryland Local Government Investment Pool | 11,696 | 48 | 62 | 76 | 0.99990 |
| AAAm | Colorado Local Government Liquid Asset Trust (COLOTRUST PLUS+) | 11,648 | 50 | 81 | 56 | 1.00023 |
| AAAm | Local Government Investment Cooperative | 11,258 | 52 | 73 | 62 | 1.00048 |
'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
- Credit Conditions North America Q1 2024: A Cluster of Stresses, Nov. 28, 2023
- Economic Outlook U.S. Q1 2024: Cooling Off But Not Breaking, Nov. 27,2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Tyler Dunn, Farmers Branch +1 214 765 5869; tyler.dunn@spglobal.com |
| Secondary Contacts: | Kara Wachsmann, Englewood + 303 721 4547; kara.wachsmann@spglobal.com |
| Michael Masih, New York + 1 (212) 438 1642; michael.masih@spglobal.com |
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