Global MMF 2023 Sector Outlook Is Deteriorating

Published: December 08, 2022

Fitch Ratings' 2023 sector outlook for global money market funds (MMFs) is deteriorating, reflecting Fitch’s expectations for deterioration in some key banking sector outlooks, continued market volatility and potential considerable flow and asset under management (AUM) dynamics. Evolving global regulation will be key, but should have sufficient lead time for market participants to react accordingly.

Fitch anticipates a worsening in the credit environment in 2023 amid a challenging macroeconomic backdrop, and, as a result, expects deteriorating credit outlooks in 2023 for securities and sectors MMFs invest in. The deteriorating outlook on some banking sectors indicates Fitch’s significant uncertainty about the credit quality of this segment, which will have a knock-on effect on money funds as portfolios are concentrated in this sector.

Central bank policy rate tightening in the US and Europe is likely to slow in 2023 and reach terminal rates. Fund managers reduced weighted average portfolio maturities (WAMs) to position for rising rates. We expect this to reverse as monetary tightening slows and expect fund managers to extend the duration of maturities, which would increase market risk sensitivity.

High inflation and interest rates, coupled with global recessionary pressures, contribute to mixed expectations for 2023 MMF flow direction and may lead to heightened flow volatility in funds. Continued market volatility driven by the downturn could lead to sizeable outflows in a stressed market, but, alternatively, investor flight-to-safety may attract inflows for the MMF sector overall.

Fitch expects European AUM in ESG MMFs to continue to grow and for US AUM to remain stable in 2023. We expect increased reputational and regulatory risks in 2023 as higher ESG activity, beyond just MMFs, continue to attract regulatory attention.