The neutral sector outlook for global money market funds (MMFs) is driven by the overall neutral credit environment, the expectation of manageable industry flows, and the limited impact from regulatory changes, Fitch Ratings says in a new report. Drivers are expected to have different impacts in the US, Europe and China.
Fitch expects MMF managers to selectively increase duration to lock in yields, potentially exposing funds to valuation volatility in an uncertain macroeconomic environment. The neutral outlooks on French, Canadian, Japanese, UK, German and western Europe banks indicate a neutral credit environment, which directly affects the assets in which MMF invest. The deteriorating outlook on the US banking sector is mitigated by the higher-quality investments for prime MMFs. Fitch anticipates central banks, globally, to hold rates until 2H24, with any subsequent reduction varying by magnitude and pace. We expect this to result in manageable MMF flows.
MMF regulatory changes in China only affect the large MMFs. Structural US reforms that increase liquidity thresholds and introduce mandatory liquidity fees may result in flows from prime MMFs to treasury or government MMFs, or further consolidation of the prime MMFs. The EC recommended no regulatory reform, while the UK regulator published a consultation paper setting out proposals to update UK MMF regulatory regime in December.
Commenting on the report, Minyue Wang, Director at Fitch Ratings, said “Fitch’s neutral sector outlook reflects generally neutral credit environment supported by outlooks in key banking sectors, as well as MMFs’ investable universe consisting of mostly high-quality banks which tend to have stronger rating headroom. We also expect overall balanced industry flows for most of 2024 across regions, and limited impact from regulatory changes subsequent to their 2023 finalisation.
“We will continue watching the impact from changes in market conditions under the backdrop of funds selectively extending maturity while maintaining high liquidity levels.”