'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 recorded €1.06 trillion in assets under management as of June 30, 2024. In the 12 months to June 30, 2024, net assets in all three currencies covered in this report have seen asset increases, with euro-denominated funds up 49% (see chart 3), sterling-denominated funds up 4.5% (see chart 5), and U.S. dollar-denominated funds up 16% (see chart 7). With inverted yields curves across all three currencies, short-dated and high quality money market funds offering returns close to or in excess of the respective central bank base rates continue to be attractive to investors.

How long that attractiveness lasts remains to be seen, as peak rates have been recorded, in our view, and the slide downhill has begun. During the second quarter, the European Central Bank (ECB) lowered its deposit rate by 25 basis points (bps), settling at 3.75%. The subsequent effect is already noticeable on euro-denominated funds with their average seven-day net yield falling 20bps over the quarter (see table 1). There were no interest rate movements from the Bank of England or Federal Reserve during the second quarter, but interest rates' direction seems clear as inflation continues to decline toward targets. The market anticipation of future rate cuts is already impacting fund yields, with sterling dropping 4bps and the U.S. dollar dropping 2bps (see table 1).

In response to the ECB's cut, euro-denominated funds extended their weighted-average maturities (WAM) profiles by six days during the quarter, rising to their highest level since March 2022. Over the last 12 months, euro-denominated funds have averaged a 33-day WAM, so the extension to 40 days (see chart 1) is portfolios' action to navigate the drop in fund returns since the ECB's rate cut. For sterling-denominated and U.S. dollar-denominated funds, WAMs remained flat over the quarter but have extended over the last 12 months by 13 and 15 days, respectively.

Focusing on credit quality, a significant market event was the downgrade of France by S&P Global Ratings (see "France Long-Term Rating Lowered To 'AA-' From 'AA' On Deterioration Of Budgetary Position; Outlook Stable," published May 31, 2024, on RatingsDirect. Money market funds of all currencies typically have 20%-25% exposure to French banking names and our recent Banking Industry Country Risk Assessment (BICRA) on France is unchanged, despite the sovereign downgrade. Furthermore, the sovereign rating action has not resulted in constraints to our ratings on any of the large French banks, (see "Banking Industry Country Risk Assessment On France Unchanged Despite Sovereign Downgrade," June 3, 2024). We consider credit quality to be a key factor in the stability of net asset value, and for 'AAAm' rated PSFRs the 'A-1+' portfolio's credit quality was slightly higher for euro-denominated funds over the quarter and recorded its highest average level since April 2023. For U.S. dollar- and sterling-denominated funds, the 'A-1+' credit quality portfolio remained consistent over the quarter and steady over the last two years (see chart 2).

On the macroeconomic front, most economies have seen solid growth in 2024 so far, while upgrades have outnumbered downgrades among corporates, financial institutions, and sovereigns. GDP growth has moderated in most economies (the U.S. remains an outlier) and recessions have been avoided. Demand pressures have come down, bringing inflation back toward targets. Services demand and employment remain robust, moderating the speed of decline, and bolstering the probability of a soft landing, see "Q3 2024 Global Economic Update: The Policy Rate Descent Begins," June 26, 2024.

Table 1

Table 2

Table 3

Chart 1

Chart 2

Chart 3

Chart 4

Chart 5

Chart 6

Chart 7

Chart 8

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

Table 4

Table 5

Table 6

Related Research

• Global Credit Conditions Q3 2024: Soft Landing, Fragmenting Trajectories, July 1, 2024
• Q3 2024 Global Economic Update: The Policy Rate Descent Begins, June 26, 2024
• Banking Industry Country Risk Assessment On France Unchanged Despite Sovereign Downgrade, June 3, 2024
• France Long-Term Rating Lowered To 'AA-' From 'AA' On Deterioration Of Budgetary Position; Outlook Stable, May 31, 2024
• European 'AAAm' Money Market Fund Trends (First Quarter 2024), April 29, 2024