This is one of those instances when it is best to be direct. As soon as the news hit about Moody’s recent downgrade of the US credit rating, we knew cash managers would be fielding questions about its impact on US money market funds. There are no ramifications: the rating agency has affirmed its Aaa-mf assessment of money funds is unaffected by the “demotion”.
It’s been some time since the other two major agencies lowered their US ratings – the S&P in 2011 and Fitch in 2023 – but it was almost instantly old news in our minds. The downgrades reflect the agencies’ views on the federal government’s inability to reduce its mammoth debt. By its nature, that is a long-term problem, meaning applicable to US Treasury bonds and notes. Bills, which have shorter maturities, are not subject to the same concern. And, among the three, most money market funds predominately or exclusively own bills.
So, why doesn’t a US downgrade impact a money fund rating? Well, it’s all about time and methodology.
Like the others, Moody’s framework takes a holistic view of a fund, incorporating not only a credit assessment but also maturity and liquidity metrics, among other aspects. Although the downgrade may affect the credit-quality measure, the short-term nature of money fund holdings due to the maturity restrictions of Rule 2a-7 likely kept this impact modest. At the same time, the very high liquidity positions of these products remains robust, augmenting the overall stability profile of portfolios.
Critically, money fund risk management measures go several steps beyond simply choosing US Treasury bills over notes and bonds.
Critically, money fund risk management measures go several steps beyond simply choosing US Treasury bills over notes and bonds. Generally speaking, the weighted average maturity of a fund’s entire portfolio must be 60 days or less, it must hold a large amount of securities redeemable daily or weekly, and any asset it holds other than T-bills (such as Fannie Mae securities or commercial paper) must also be highly rated. In other words, Moody’s and the like have not changed their opinion about the soundness of these financial products that operate in the short range of high-quality securities and that seek stability and preservation of capital. We think investors reach the same conclusion.
The Fed’s own ‘Independence Day’
President Donald Trump has tested the bulwark protecting the US Federal Reserve (the Fed) from political interference and found it as sturdy as ever. His insults of Fed Chair Jerome Powell are one thing, but claiming he had the authority to fire him is another. That stance threatened the Fed’s independent stature and was serious enough to earn a slapdown by the bond market. No one bullies like bondholders.
But when the administration dismissed the leaders of two independent agencies, the National Labor Relations Board and the Merit Systems Protection Board, concern arose that Trump might try an end-around to replace the Federal Reserve Board of Governors, which, of course, includes Powell. Thankfully, the Supreme Court stepped in. While it affirmed that the White House could dismiss the directors in question, it proactively shut the door on any similar attempt with the central bank: “The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States. » That ruling came on 22 May, though as far as the Fed is concerned, it might as well have happened on 4 July.
The fact that the high court issued this carve-out without being specifically asked about it should convince Trump that he has no case. This doesn’t mean he will stop. He recently met with Powell at the White House to say the chair is, “making a mistake by not lowering interest rates,” according to the president’s spokesperson. The June 18 Federal Open Market Committee (FOMC) meeting is all but certain to result in no rate change. It is equally clear that Trump will continue to criticise Powell.
An updated Summary of Economic Projections is always notable, and the FOMC will release one at the meeting, but it might not hold as much insight as usual. So long as the fog that is the administration’s fiscal and trade policy obscures the state of the economy, Fed voters are likely to reiterate their “wait-and-see” position.
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