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Our views 04 June 2025

Liquidity lowdown: How changing rate expectations are shaping money market funds in 2025

5 min read

In 2025, money market funds (MMFs) have been navigating a challenging environment shaped not just by actual interest rates, but by shifting expectations about where those rates are heading and will eventually land.

As central banks around the world signal potential policy pivots, investors are reassessing their strategies—making rate expectations a powerful force in short-term investment decision making.

While actual interest rates remain the key driver of returns, it's the expectation of future rate movements that often have a more immediate impact on investor behaviour. At the end of April 2025, markets were fully expecting the Bank of England (BoE) to cut interest rates to 4.25% from 4.50%, which they duly delivered on 8th May 2025. While the BoE maintained its “gradual and careful” policy guidance, the dissent within the Monetary Policy Committee (MPC) prompted a repricing of rate expectations, especially on longer-term bonds. Before the meeting, markets were anticipating four rate cuts in 2025, but the split voting caused markets to revise this down to just two rate cuts. For money market assets, this caused an almost instantaneous adjustment in the yields offered, despite being focused on short-term interest rates. As a result, yields on certificates of deposit (CDs) have been forced higher. Although we are comfortable that short-term rates are moving lower, the extent of the BoE’s response will depend heavily on upcoming economic data and the overall health of the economy. Given the prevailing level of uncertainty, it is difficult to accurately forecast where the terminal rate will ultimately settle, with economists predicting that that the figure could range between 2.50% to 3.50% by early 2026. This latest shift in rate expectations has caused 1-year CDs to rise as much as 20 basis points throughout May 2025, presenting investors with opportunities to lock in more favourable returns. Shorter duration CDs have also risen in response, but to a far lesser extent, with yields on 3-6 month CDs rising by a more modest 3-4 basis points.

The extent of the BoE’s response will depend heavily on upcoming economic data and the overall health of the economy.

Adjusting the duration (measured by the weighted average maturity, known as WAM) within a MMF is a natural response to these types of changes. If money managers believe that the market expectations of rate cuts go further than their own estimates of rate cuts (i.e. the money manager believes rate cuts will be slower or of smaller magnitude compared to market expectations), they may choose to maintain or shorten a fund’s duration. Conversely, the money manager can have a relatively higher duration if they believe the pace or magnitude of rate cuts will be higher than market expectations. This latter stance reflects our current view, so we have taken the opportunity to extend the WAM to take advantage of more attractive yields in a rate declining environment. Assets which mature within one day remain largely unaffected by changes in interest rate expectations. Yields on those assets are predominantly driven by actual interest rates and will closely track SONIA (Sterling Overnight Index Average).

MMFs have seen significant inflows over the last several years. Monetary policy remains restrictive, so yields on MMFs are still attractive, and along with an inverted yield curve and an increase in economic uncertainty, investors have continued to utilise MMFs as not only a conservative strategy for daily cash management, but for more strategic investing through a combination of MMFs and longer maturity liquidity and short-dated fixed income strategies. This latest shift in expectations has supported our view that MMFs, known for their low volatility and low risk profile, remain a safer and more dependable asset class than other areas such as equities, with MMFs continuing to see strong inflows during 2025.

 

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.