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'AAAm' Local Government Investment Pool Trends (Second-Quarter 2024)

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U.S LGIPs Maintained Asset Growth From Prior Seasonal Inflows

Prime LGIPs continued to grow in second-quarter 2024, while government strategies saw a slight decline, with overall asset growth plateauing. Prime LGIPs expanded to $286 billion (a 2.5% increase from the prior quarter), and government LGIPs fell to $93 billion (a 5% decrease). Prime LGIPs are those that have the ability to invest in corporate and bank credit securities--similar to prime money market funds.

Outflows and stabilization typically occur in the second quarter, owing to the cyclical nature of LGIPs. We think state and local government spending trends could lead to drawdowns and limit growth in the third quarter.

Chart 1

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LGIPs Yields Remain Elevated

LGIPs yields experienced minimal change (see table 1). In second-quarter 2024, there was a minimal decrease in both prime (4-basis-point [bps] decline) and government net yields(1-bps decline). With small to no change in asset allocation, the slight decline can be attributed to a small drop in Treasury yields in addition to a slight decline in yields for other investments (such as commercial paper and deposits).

Table 1

'AAAm' LGIP seven-day net yield (%)
Index Jun-2023 Sep-2023 Dec-2023 Mar-2024 Jun-2024
S&P Global Ratings ‘AAAm’ government LGIPs 5.04 5.30 5.32 5.28 5.27
S&P Global Ratings ‘AAAm’ prime LGIPs 5.22 5.48 5.49 5.44 5.40

NAV Stability

The net asset value (NAV) per share averaged 0.99991 in second-quarter 2024. NAV strength demonstrates managers continuing to prioritize liquidity and high-quality investments. Weekly liquid assets (assets maturing in less than seven days) remained near 45% for government funds while prime funds remained unchanged at 40%.

Chart 2

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Chart 3

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Managers Reduced WAMs For Prime Funds, Which Are Now Similar To Those Of Government Funds

Prime strategy funds typically have longer weighted average maturities (WAMs) relative to government LGIPs (see table 2 and chart 4). However, throughout second-quarter 2024, the gap between prime and government WAMs narrowed. On average, government-focused LGIPs had a WAM of 35 days in June, compared to 36 days in the first quarter. Prime LGIPs averaged a 38-day WAM in June, a decrease from 40 days.

We think the decline in WAMs may imply minimal value in extending, or perhaps funds are staying liquid as managers anticipate drawdowns for the third quarter. Uncertainty about the direction and timing of rate cuts from the Federal Reserve could be an additional factor.

Table 2

AAAm' LGIP weighted-average maturity (in days)
Index Jun-2023 Sep-2023 Dec-2023 Mar-2024 Jun-2024
S&P Global Ratings ‘AAAm’ government LGIPs 24 27 36 36 35
S&P Global Ratings ‘AAAm’ prime LGIPs 36 41 46 40 38

Chart 4

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Chart 5

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Economic Updates

The underlying instruments in LGIP portfolios are generally high credit quality ('A-1' or higher) U.S. government, U.S. 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 Q3 2024: A Brighter Outlook, Laden With Risks," June 25, 2024, and "Economic Outlook U.S Q3 2024: Milder Growth Ahead," June 24, 2024.

  • S&P Global Ratings' economists expect the U.S. economy is on track for 2.5% growth in 2024, which is unchanged from the March forecast.
  • S&P Global Ratings' economists forecast the Fed to start reducing its policy rate in December.
  • In the second quarter, North American upgrades outpaced downgrades for the first time in two years.

Table 3

AAAm' LGIP 'A-1+' credit quality (%)
Index Jun-2023 Sep-2023 Dec-2023 Mar-2024 Jun-2024
S&P Global Ratings ‘AAAm’ government LGIPs 99 99 99 100 99
S&P Global Ratings ‘AAAm’ prime LGIPs 64 64 64 63 63
LGIP--Local government investment pool.

Chart 6

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Chart 7

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Chart 8

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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 33,456 35 96 100 1.00000
AAAm North Carolina Capital Management Trust - Government Portfolio 20,583 32 84 99 1.00011
AAAm New York Cooperative Liquid Assets Securities System (NY CLASS) 12,046 40 73 100 1.00005
AAAm Texas Short Term Asset Reserve (TexSTAR) Cash Reserve Fund 10,916 34 63 100 0.99995
AAAm Lone Star Investment Pool- Government Overnight Fund 6,392 34 101 98 0.99990
AAAm Pennsylvania School District Liquid Asset Fund - Max Series 2,422 35 46 100 1.00000
AAAm New Jersey Asset & Rebate Management Program/Joint Account 1,891 42 105 100 0.99992
AAAm New York Liquid Asset Fund - MAX Portfolio 1,452 38 38 100 0.99995
AAAm Texas Cooperative Liquid Assets Securities System (TX CLASS Government) 1,387 7 91 100 1.00004
AAAm Nebraska Liquid Asset Fund 905 42 104 100 0.99995
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 Texas Cooperative Liquid Assets Securities System (TX CLASS) 26,101 24 77 54 0.99995
AAAm Florida PRIME 25,503 46 83 54 0.99990
AAAm State Treasury Asset Reserve of Ohio (STAR OHIO) 24,783 44 57 66 0.99992
AAAm California Asset Management Trust/Cash Reserve Portfolio 20,205 39 79 55 0.99983
AAAm Connecticut State Treasurer's Short-Term Investment Fund 17,994 33 77 79 1.00009
AAAm Colorado Local Government Liquid Asset Trust (COLOTRUST PLUS+) 15,310 32 87 53 0.99995
AAAm TEXPOOL Prime 14,855 41 78 58 1.00000
AAAm Virginia Local Government Investment Pool 14,834 50 91 77 0.99993
AAAm Local Government Investment Cooperative 12,509 45 68 61 0.99992
AAAm West Virginia Money Market Pool 9,736 35 68 53 0.99995
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

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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