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.

2024 Year End Market Comment

LGIPs concluded 2024 with record-high asset levels. The noteworthy growth is driven by various factors, such as attractive yields, increased tax proceeds, and residual federal stimulus balances post COVID-19, which continue to elevate pool assets.

Throughout 2024, LGIPs generally maintained competitive yields compared with alternative short-term liquidity options as they outpaced bank deposits and, at times, institutional money market funds.

Pool managers positioned WAMs conservatively in 2024 while seeking opportunities to extend duration where prudent. Market dynamics, such as the inverted yield curve and uncertainty on policy rate cuts, served as a limiting factor when considering extending.

U.S. LGIPs' Assets Tick Higher

Rated pools received inflows throughout the fourth quarter, particularly in the prime sector. Overall rated LGIP assets climbed to $390 billion. Government LGIPs increased to $99 billion (up 3.6% from prior quarter) and prime LGIPs increased to $291 billion (up 4.3% from prior quarter). Prime LGIPs are those that have the ability to invest in corporate and bank credit securities--similar to prime money market funds.

LGIPs generally see an asset influx approaching year-end due to seasonal trends related to tax revenue. We anticipate additional inflows throughout the first quarter of 2025, in line with historical trends.

Chart 1

LGIP Yields Declined Following Rate Cuts

Following the Federal Reserve's 25 basis point (bps) December rate cut, government and prime yields fell to 4.41% (58-bps decline) and 4.58% (50-bps decline), respectively (see table 1). Like institutional money market funds, average prime LGIP yields decreased at a slower rate than government pools, resulting in a marginally expanded spread.

Table 1

NAV Stability

The NAV per share averaged 1.000151 in fourth-quarter 2024. Fourth-quarter NAV ranges were tighter than past quarters, likely due to seasonal inflows and an increased allocation to U.S. Treasuries. In our view, the NAV resiliency in rated LGIPs demonstrated pool managers emphasizing liquidity and high-quality investments, even while seeking opportunities to extend average maturities.

Chart 2

Managers Start To Extend Maturities But Overall Are Remaining Conservative

In our view, a portfolio's WAM is a key measure of a fund's tolerance and sensitivity to changes in interest rates. Based on recent Fed policy, managers have remained conservative both from a WAM and weighted-average life standpoint. On average, managers extended WAMs in government funds to 36 days (+8 days) and prime funds to 40 days (+6 days). Pools have been cautious in their approach to investment allocation, mostly remaining unchanged, with a small uptick in U.S. government securities and a decrease in agency floaters. Based on our observations, we note that managers may use longer dated treasuries as a tool to prudently extend WAMs slightly while maintaining high levels of liquidity and credit quality.

Chart 3

Chart 4

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 the impacts of economic conditions on such investments, we cite some of the key takeaways from recent reports: "Credit Conditions North America Q1 2025: Policy Shifts, Rising Tensions," Dec. 12, 2024, and "Economic Outlook U.S. Q1 2025: Steady Growth, Significant Policy Uncertainty," Nov. 26, 2024.

• S&P Global Ratings economists forecast the Fed's policy rate falling to 3.00%-3.25% by fourth-quarter 2026.
• We expect the U.S. economy to expand 2% in the next two years, following 2.7% growth in 2024.
• The suspension of the debt ceiling expired in early January, but we expect congressional action later in 2025.

Table 2

Chart 5

Chart 6

Chart 7

Table 3

'AAAm' Local Government Investment Pools

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 2025 Slides: Policy Shifts, Rising Tensions, Dec. 12, 2024
• Economic Outlook U.S. Q1 2025: Steady Growth, Significant Policy Uncertainty, Nov. 26, 2024