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.

U.S. LGIPs Begin 2025 With Seasonal Inflows

Rated pools experienced typical inflows during the first quarter of this year--mostly because of seasonal tax revenue collections balances invested within these funds--and rated LGIP assets overall rose to $419 billion, a new high. Government LGIPs grew to $109 billion (up 10.3% from the prior quarter), and prime LGIPs increased to $310 billion (up 6.7%).

We expect assets to plateau in the second quarter, since state and local governments' spending patterns may lead to drawdowns, consistent with historical trends.

(Prime LGIPs are those that have the ability to invest in corporate and bank credit securities--similar to prime money market funds.)

Chart 1

LGIP Yields Gradually Declined

LGIP yields continued to decline in the first quarter and are roughly 100 basis points (bps) lower than where they were in early 2024. After the Federal Reserve's rate cut in December, government LGIP yields fell to 4.27% (down 14 bps from the prior quarter), and prime LGIP yields fell to 4.41% (down 17 bps from the prior quarter).

Table 1

NAV Stability

NAV per share averaged 1.000061 in the first quarter of 2025. First-quarter NAV ranges were slightly wider than the fourth-quarter NAV ranges, likely because of reinvestment of inflows and a marginal decrease in the allocation to U.S. Treasuries (which was approximately 4% for prime funds and 2% for government funds). In our view, the NAV resiliency in rated LGIPs signaled that pool managers were emphasizing liquidity and high-quality investments.

Chart 2

Market Dynamics And Uncertainty Limit The Extension Of Weighted-Average Maturities

Because of uncertainty about the pace and timing of rate cuts, managers have remained conservative with respect to both WAM and weighted-average life. On average, managers marginally extended WAMs in government funds (by three days, to 39 days) and in prime funds (by two days, to 42 days).

Among other factors, the shape of the yield curve typically influences manager strategy. We view the slightly inverted yield curve, primarily affecting investments of less than one year, as another constraint to extending. The front of the curve currently offers the highest value, especially in the one- to two-month range, which likely explains limited extensions beyond the 40-day mark.

Chart 3

Chart 4

Portfolio Composition

Pools have been cautious in their approach to investment allocation, with minimal change. As mentioned, both prime and government funds have slightly reduced their exposure to U.S. government securities, possibly because of market volatility and rate policy uncertainty. We expect that managers will be strategic with respect to certain government maturities later this year as expectations evolve regarding congressional action related to the debt ceiling. Government funds experienced a small increase in their exposure to repurchase agreements and agency floaters, whereas prime funds increased their allocation to commercial paper.

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 2 and chart 5). Recognizing the impacts of economic conditions on such investments, we cite some of the key takeaways from recent reports: "Credit Conditions North America Q2 2025: Uncertainty Prevails," published March 26, 2025, and "Economic Outlook U.S. Q2 2025: Losing Steam Amid Shifting Policies," published March 25, 2025.

• S&P Global Ratings economists are forecasting that the Fed's policy rate will fall to 4.00%-4.25% by the end of 2025.
• We anticipate a likely downshift in GDP growth this year, to a 1.6% quarterly average.
• We project that inflation will remain closer to 3.00% in 2025 as tariffs increase prices along the domestic supply chain and for end consumers.

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

• U.S. Domestic 'AAAm' Money Market Fund Trends, April 30, 2025
• Credit Conditions North America Q2 2025: Uncertainty Prevails, March 26, 2025
• Economic Research: Economic Outlook U.S. Q2 2025: Losing Steam Amid Shifting Policies, March 25, 2025