Fitch Ratings’ 2022 sector outlook for global money market funds (MMFs) is neutral, reflecting expectations for a stabilising credit environment, modestly rising interest rates in major developed economies and manageable flow and asset under management (AUM) dynamics. Evolving MMF regulation brings uncertainty, but, given the length of previous regulatory review cycles, should give sufficient time for market participants to adapt.
Global inflationary pressures are likely to lead to tighter central bank policy rates. Potential rate rises should be manageable for MMFs and could contribute to increased revenues for MMF providers. Fitch expects fund managers to reduce weighted average portfolio maturities (WAMs) to position for rising rates. Low WAMs reduce mark-to-market net asset value declines, and potentially facilitate increased market yields being passed on to investors more quickly, depending on managers’ approaches to fee reductions.
Fitch expects more underlying issuers’ Negative Rating Watches or Outlooks to be resolved or removed and anticipates continued stablisation in the credit environment in 2022 as economies continue to recover from the pandemic. Nonetheless, as of end-October 2021, a higher share of widely held issuers in MMF portfolios were on a Negative Outlook or Rating Watch Negative than before the pandemic, indicating that credit risk remains elevated.
Fitch expects global AUM in ESG MMFs will continue to grow in 2022. Global ESG MMF growth has been present in Europe and the US, and is primarily driven by fund conversions. We expect more regulatory development alongside the expanding product offerings.