Liquidity outlook 2026

At a headline level, economic forecasts point to continued economic expansion across core markets. Economic growth, although slow, should be broadly favourable for credit conditions (see Figure 2). However, several major economies have limited fiscal headroom and / or structural issues to address.  That raises the risk of policy missteps or adverse geopolitical developments triggering a deterioration in credit conditions.

Overall, as discussed in our Q4 2025 Fixed Income Compass report, we still see selective opportunities, despite the uncertainty around inflation, central bank policy, and global growth. We continue to favour a modestly bullish stance on UK front-end rates, while taking a neutral view on the US (having been bullish earlier in 2025). In Europe, we don’t expect the European Central Bank to adjust its deposit rate over the next six months. We think spreads remain attractively priced across GBP, EUR and USD markets and retain a bullish bias.

From a bottom-up perspective, major credit rating agencies’ outlooks for banks, the mainstay of MMF portfolios, are broadly stable. Fitch, for example, has a neutral sector outlook on western European and US banks, with “stable” rating outlooks for most of the rating stock. France is a key outlier: Fitch has noted the country’s prolonged period of political uncertainty could have negative repercussions on local banks’ business performance. Other rating agencies’ views are broadly aligned. From a portfolio construction perspective, we are accordingly more cautious – and hence selective – on French bank exposure, in terms of issuer selection, sizing and maturity allocation alike.

European MMFs benefitted from another year of strong inflows, as shown in Figure 3. At the end of November 2025, the Institutional Money Market Fund Association (IMMFA), which represents around 60 per cent of total European MMF assets, reported similarly strong flows into member firm European MMFs:

• USD funds grew by 16.5 per cent (to USD 773.5 billion under management)
• GBP funds grew by six per cent (to GBP 258 billion)
• EUR funds gained three per cent (to EUR 262 billion)

Broadly positive flows give MMF managers – and therefore MMF investors – a key advantage: they can allow MMF managers to offset outflows with new inflows, avoiding the need to either reduce liquidity levels or trade money market instruments. That said, our prudent approach to portfolio management means we will occasionally test the market with trades, even when flows are positive.

In 2025, MMFs have also maintained high levels of liquidity on average (see Figure 4). With a daily liquidity average (DLA) of around 30 per cent and a weekly liquidity average (WLA) of 40 to 45 per cent, liquidity is unambiguously high. As a reference point, minimum liquidity requirements for Low Volatility Net Asset Value (LVNAV) MMFs are ten per cent DLA and 30 per cent WLA. MMF liquidity is well above those levels, meaning the funds should be resilient to significant levels of outflows, should they ever materialise.

US MMF flows face a key question in 2026

Meanwhile, flows into US onshore MMFs continued to be strong in 2025, hitting a new high of USD7.65 trillion on December 3.¹ That is almost USD 800 billion of new money – a gain of around 12 per cent.

How can we understand these flows? On one level, they are extraordinary; on another, they simply reflect normality. Over the long run, US MMFs represent 16 to 17 per cent of total US mutual fund assets. That ratio has been quite stable over time. As money has flowed into US mutual funds, a “normal” amount of that has flowed into MMFs. Unpacking the figures, we see slightly more growth in retail than institutional MMF assets, with the consequence that the retail share in US MMFs has ticked up slightly.

A key question for markets will be whether any of that money flows out if the US Federal Reserve cuts rates. It is possible; money does tend to flow out in rate cutting cycles. But the gradual cutting cycle we are experiencing so far may moderate this effect. More fundamental is the proportion of money in MMFs: US MMF assets are stable as a share of mutual fund assets – or indeed wider financial assets. Unless this relationship breaks, or financial assets fall, MMF assets actually have further room to grow.

There is no escaping the fact that central bank rates are forecast to fall in the US and UK, perhaps remaining more stable in Europe. And as central bank rates fall, so too do MMF yields.

However, in this kind of environment, portfolio construction can play a critical role in realising returns. All being equal, adding duration, i.e. extending a portfolio’s weighted average maturity (WAM), should benefit funds when rates are falling. Equally, however, the pricing of instruments is highly sensitive to prevailing market expectations at the time of their purchase. This is where the combination of a rigorous and repeatable process comes into its own. Consistently getting the forecast right while being sensitive to market pricing makes a difference.

Waiting a few days after a rate change before moving money between funds can also help. Some instruments reset at different times after a rate change, and the way a portfolio is allocated can significantly impact the speed at which a rate change affects yields. By waiting a few days for things to settle, investors can make a more informed choice as to which funds are best positioned for the new rate level.

Last year, we expected to see regulatory changes in 2025. These didn’t happen. But looking ahead to 2026, there are three new facts to consider.

First, the UK’s Financial Conduct Authority (FCA) consulted on MMF regulation in late 2023. Almost two years have now elapsed, so we think there may be a follow-up in 2026.

Second, Hong Kong’s Securities and Futures Commission (SFC) is consulting on changes to the Unit Trust code, which includes MMFs.² The SFC proposes increasing the required weekly liquidity level for constant net asset value MMFs to 50 per cent.

Third, the European parliament has recently been asking questions about the progress of reforms.³

The last point is the most significant for European cash investors, given that most European MMFs are domiciled in Ireland, Luxembourg or France. The views of the UK’s FCA and Hong Kong’s SFC may also influence thinking in Europe and contribute to an increasing urgency to make progress.

From recent conversations we have been having, it looks like Europe wants to avoid reopening the MMF regulation. Rather, it is seeking to just make a few targeted changes. That might be politically expedient, but it would be hard to pull off: the European MMF regulation was a compromise agreement, and different groups in Europe have different ideas on how MMFs should be regulated.

On the other hand, MMFs have proven resilient in their current form. They navigated both the March 2020 and September 2022 market stress periods successfully. With many other competing priorities on regulators’ agendas, MMFs could conceivably slip down the priority list once again in 2026.

If regulations do change, we expect this to include the following:

• “Delinking”: Removing the link between weekly liquid assets and the potential imposition of liquidity fees and gates. The European Commission has already indicated it is minded to remove this link, as it has proven to have unintended consequences. That’s a positive, in our view.
• Increased liquidity requirements: The US Securities Exchange Commission (SEC) has mandated higher liquidity levels, while both the UK’s FCA and Hong Kong’s SFC have consulted on higher levels, up to 50 per cent weekly liquid assets in some cases. While the European Commission has stated that current levels are adequate (30 per cent for LVNAVs), we are seeing demands for more coming from multiple quarters. Higher levels should make liquidity funds safer but may not be needed. To date, current liquidity levels have proven adequate even in severe scenarios. More fundamentally, higher liquidity levels could well reduce the yield liquidity funds can generate.

In 2025, the first tokenised MMFs appeared in Europe as “digitally native” tokenised MMFs launched in France and Luxembourg. Simply put, a tokenised MMF is a digital version of a conventional MMF. Tokenised MMFs exist either fully on blockchains or in a hybrid format – with records maintained in both traditional and digital (i.e. maintained on a digital ledger) forms. The key advantage tokenisation offers is the ability to transfer instruments near-instantaneously, with high levels of efficiency and security. This could potentially unlock a wide range of new uses.

There are blockers to widespread adoption – in terms of regulation, operations and behaviour. However, regulators have been actively considering tokenisation, and related topics such as stablecoins. These point towards widespread agreement on the benefits of the technology and should, over time, support broad take-up.

Given the current regulatory and market focus on this topic, this is one to watch. We expect more launches in this space in 2026.

We expect broadly favourable conditions for liquidity investors in 2026, driven by overall benign credit conditions. We think we are approaching the nadir of the current rate-cutting cycle, and that its low point will be materially higher than in the recent past. While MMF yields will be affected, we think they will remain attractive overall.

From a portfolio management perspective, given the potential volatility around rate change dates in 2026, prudent investors will likely want to pause before switching funds after any rate movement. This will allow them to assess the full impact of any changes.

We anticipate some movement on the regulatory front in 2026, particularly in the UK, but regulators have other priorities. MMFs have demonstrated resilience through two recent periods of stress, suggesting not much change is necessary. Instead, regulators are likely to focus on tokenisation – a topic attracting the attention of both policymakers and the market. We expect this area to deliver some interesting developments in 2026.