'AAAm' Money Market Fund Indicators

S&P Global Ratings' 'AAAm' money market fund (MMF) indicators are metrics of Europe-domiciled 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 MMFs with a 'AAAm' principal stability fund rating (PSFR).

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

Market Comment

Europe-domiciled MMFs rated by S&P Global Ratings reached another all-time high in terms of assets under management (AUM) as of March 31, 2024, totalling €1.15 trillion. In the 12 months to March 2024, net assets in euro and U.S. dollar-denominated funds have increased 55% (see chart 3) and 13% (see chart 7), respectively, while sterling-denominated fell 4% over the period (see chart 5). Since the U.K.'s mini-budget crisis and the recorded asset highs of £266 billion in October 2022, sterling-denominated fund assets have fallen 16% but have operated within a +/-5% range of monthly totals over the past 12 months (see chart 5).

On the macroeconomic front, the broad consensus is that central banks will start cutting rates in the summer, but cuts will be somewhat measured this year, keeping policy rates higher than initial market expectations at the start of 2024. Euro-area inflation is falling but price stability is still some way off. We expect inflation will only return to the European Central Bank's (ECB's) 2% target in mid-2025. This means that the ECB has less scope than before to continue cutting rates after 2024. We expect the ECB deposit rate will decline to 2.5% by the end of 2025.

For the U.K., we expect low growth and high inflation will gradually ease this year. Consequently, borrowing costs, which will remain elevated as the Bank of England (BoE) seeks to reduce inflationary pressures. With slower price rises on track, we expect the BoE will reduce interest rates from August 2024. Financing conditions have already eased and lower interest rates will encourage a gradual acceleration in corporate and housing investments. For further information, see "“Credit Conditions Europe Q2 2024: Credit Heals, Defense Shields," March 27, 2024.

According to our economists, the U.S. economy is on track for 2.5% growth, with support from a sturdy labor market. They also forecast that the Fed won't cut its policy rate until July and expect sharper rate cuts in 2025. For further information, see "Credit Conditions North America Q2 2024: Soft Landing, Lurking Risks," March 27, 2024, and "Economic Outlook U.S. Q2 2024: Heading For An Encore," March 26, 2024

Since interest rate cuts are on the horizon in 2024, in the first quarter we have seen seven-day net yields fall, with sterling and U.S. dollar-denominated funds both dropping by seven basis points (bps) to 5.16% and 5.28%, respectively. Seven-day net yields for euro-denominated funds rose five bps over the first quarter but have since fallen seven bps from their January 2024 peak to finish the quarter at 3.86%.

We have commented in the past that as interest rates decrease, we are likely to see an extension of weighted-average maturities (WAM) profiles. Sterling-denominated funds have had the largest WAM extension during the quarter with an average extension of 10-days, finishing the quarter at 44 days. Correspondingly, euro and U.S. dollar funds each extended one day during the first quarter.

Notably, though, in the 12 months to March 2024, euro funds have extended 15 days, sterling funds 12 days, and U.S. dollar funds 21 days (see chart 1).

We consider credit quality to be a key factor in the stability of net asset value (NAV) and view the price of higher-rated assets as more stable than investments with lower ratings. All three currencies show a consistent trend of average 'A-1+' portfolio credit quality during the first quarter increasing to 60% from 58% (see chart 2). Average 'A-1+' credit quality in U.S. dollar funds was flat at 75% in the fourth quarter of 2023, while average 'A-1+' credit quality of sterling MMFs decreased slightly to 64% from 65%. Consistent with our expectations, 'A-1+' credit quality in Europe-domiciled MMFs has been maintained above the minimum 50% minimum metric for 'AAAm' rated funds.

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Chart 1

Chart 2

Chart 3

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Chart 5

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Chart 8

Top 10 Europe-Domiciled 'AAAm' MMFs--Euro, Sterling, And U.S. Dollar--By Assets--Key Statistics

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Related Research

• European 'AAAm' Money Market Fund Trends (Fourth Quarter 2023), Jan. 31, 2024
• Credit Conditions Europe Q2 2024: Credit Heals, Defense Shields, March 27, 2024.
• Credit Conditions North America Q2 2024: Soft Landing, Lurking Risks, March 27, 2024,
• Economic Outlook U.S Q2 2024: Heading For An Encore, March 26, 2024