'AAAm' Money Market Fund Indicators

S&P Global Ratings' 'AAAm' MMF indicators are metrics of U.S. domestic managed funds that seek to maintain principal value and limit exposure to principal losses due to credit risk, as defined in our principal stability fund ratings criteria. These MMF indicators provide a benchmarking tool of the 'A-1+' credit quality, portfolio composition, maturity distribution, net asset movements, and yields of 'AAAm' principal stability rated funds.

The MMF indicators demonstrate the investment practices of funds conforming to the principal stability fund rating criteria. An individual fund's metrics below that of the S&P Global Ratings' 'AAAm' MMF indicators may indicate a more conservative approach to investment, while a fund's risk metrics well above the average may signal a more aggressive approach, albeit undertaken within the 'AAAm' principal stability fund rating constraints.

Mixed Growth in Money Market Fund Assets

Flows into rated MMFs were net positive for the first quarter. A small decline (-0.3%) for government MMFs was offset by the 6% growth for prime MMFs. The decline in government MMF assets was the first in more than 12 months. In our view, while interest rates remain high, the small dip in government MMF assets is likely temporary. It's not uncommon for seasonal swings to occur around the long, Good Friday holiday weekend and the April 15 tax date.

Rated government and prime MMFs ended the quarter at $3.3 trillion and $279 billion, respectively.

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Yields for rated MMFs peaked and began trending in the opposite direction from prior quarters. Markets have begun pricing in potential rate cuts by the Federal Reserve later this year, driving yields lower. First quarter-end yields ranged from 4.3% to 5.5% for rated government funds and 5.2% to 5.6% for prime funds.

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The markets are convinced that the Federal Reserve is finished hiking interest rates. Similar to its previous policy meeting, the Federal Reserve held rates at the 5.25%-5.50% range in March. Recent economic indicators demonstrate that the economy is remaining stronger than predicted, leading to greater ambiguity on the timing of rate cuts. S&P Global Ratings economists think an initial rate cut in July is more likely than one in June and still expect 75 basis points (bps) of rate cuts in 2024. (see "Economic Outlook: U.S. Q2 2024: Heading For An Encore," March 26, 2024).

Credit In Context: Exposures In Money Markets Funds

Managers of rated government funds continued to shift exposure from repurchase agreements (repo) into Treasury bills, given relative value and supply. Average Treasury bill exposure increased to 36% from 32% over the quarter, whereas average weightings in repo decreased to 40% from 44%. Net Treasury bill issuance began declining during the quarter, and the U.S. Treasury Department has indicated that it will reduce the bill supply. Consequently, there may be movement back into repo and possibly increased usage of the Fed's Reverse Repo Program (RRP). For rated government funds with agency exposure, the level of agency holdings was stable, but exposure became biased towards fixed rate securities.

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Asset allocations in rated prime funds were generally stable quarter over quarter. Managers purchased additional Treasury bills, bringing average exposure to approximately 4%. Weightings in certificates of deposits (CDs) and bank deposits decreased moderately, and like government funds, there was a slight preference for fixed rate exposure.

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Effective 'A-1+' credit quality increased slightly in rated government MMFs and more noticeably in rated prime MMFs. Higher effective 'A-1+' credit quality exposure in prime MMFs was primarily driven by managers shortening the maturity profiles of their funds.

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MMF Managers Reverse Course On Extending Portfolios

Managers of rated government and prime MMFs shifted gears with respect to maturity profiles. During the quarter, average weighted average maturities (WAMs) for government funds increased to as high as 42 days in February, but soon after decreased by quarter-end. Prime fund average WAMs decreased throughout the quarter, by nine days overall. Through our engagement, managers cited various reasons for shortening portfolios, like expecting delayed rate cuts and preparing for new 2a-7 MMF regulations. Specifically, prime fund managers increased short-dated exposures to meet the 25% (daily) and 50% (weekly) liquidity requirements, which became effective in April 2024. Additionally, a number of prime funds are avoiding maturities after the October timeframe, as fund sponsors work through adapting to the remaining new rules, especially the logistics of the mandatory liquidity fee, and subsequently which liquidity products to offer investors.

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Stability In Money Market Funds

The distribution of NAV per share for rated MMFs narrowed quarter over quarter as a result of some funds moving downward. At quarter-end, the range for rated fund NAVs was 0.9993-1.0010.

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Top 10 'AAAm' US Dollar--By Assets--Key Statistics

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