Liquidity lowdown: The value of liquidity

It often takes an unprecedented event to realise the importance of cash. Throughout Covid-19 and the Global Financial Crisis of 2008, those with cash survived. Many investors were having to sell assets to bolster liquidity buffers throughout these extraordinary events, but those with cash found themselves in a more manageable position. By the end of 2021, interest rates were 0.10% [1] and the average investor was facing a near zero return on cash [2] or other liquidity products.  

Cash has often found itself on the sidelines (and ancillary) as investors perceive other risk asset classes to offer a greater return over the long run. While this can be true, a long time in markets can present itself with an array of market dislocations and uncertainty which in turn creates drawdowns (sometimes significant), which can mean that cash actually outperform other asset classes over the period. In 2022, following Russia’s invasion of Ukraine, the Bank of England (BoE) thought that the surge in inflation was likely to be “transitory”, a temporary spike driven primarily by external shocks such as soaring energy prices and disrupted global supply chains. The BoE believed that once these geopolitical and supply-side pressures eased, inflation would naturally fall back toward its target level without requiring aggressive monetary tightening. Their assumptions proved to be incorrect—inflation was more persistent than originally forecast [3]. 

Today, inflation in the UK stands at 3.8%, the highest out of all G-7 countries. With average inflation across the G-7 hovering around 2.0% to 2.5%—in line with central bank targets—the UK stands out as a clear outlier, reflecting unfavourably on its macroeconomic environment and fiscal stability [4]. Three years is a quite a long time in markets, however between 2021 and 2023, cash consistently outperformed bonds and stocks [5], proving it’s worth, providing strong returns relative to its risk. A seemingly short period of “transitory” inflation and geopolitical instability turned into several unrelenting years of sticky inflation and a war that still to this day has not come to an end.

The point here is not to prove the superiority of one asset class over the other, but more to highlight that even cash has its place in active investment and should be considered an “asset class” in its own right.

Market expectations for interest rate cuts have shifted over the past month. A further interest rate cut is no longer expected by the BoE this year. That means that yields on one-year Certificates of Deposit (CD) have risen up to 5bps over the month [6], and six-month treasury bills have gradually risen throughout August 2025 too [7]. Persistent stronger-than-expected inflation data has kept interest rates on cash investments higher for longer.

Cash assets tend to gain popularity during periods of heightened uncertainty, and liquidity funds have continued seeing inflows throughout 2025. Attractive returns and low risk profile are keeping cash in the spotlight.

Like any investment, cash may fall in value and is sensitive to interest rate fluctuations, with lower rates leading to lower yields. Credit spreads are currently tight by historical standards and equity valuations can experience rapid corrections. In recent times, credit, government bond and equity markets have shown increased correlation, which can raise portfolio risk. In contrast, cash has consistently remained uncorrelated with these asset classes, reducing overall portfolio volatility [8]. 

The end of 2025 is fast approaching but we are not there yet. Markets must navigate the Autumn Budget, now set to be delivered on 26th November 2025. This is perhaps the most notably event and will be closely watched by markets. For now, however, yields on liquidity funds are still above 4% [9], and we anticipate yields to remain elevated for the remainder of the year. 

[1] Bank Rate history and data | Bank of England Database

[2] The Economic Effects of Low Interest Rates and Unconventional Monetary Policy | Bulletin – September 2020 | RBA

[3] UK inflation heat puts Bank of England back in the spotlight | Reuters

[4] Inflation international comparisons: Economic indicators - House of Commons Library

[5] Money markets - ii

[6] CD Rates Over Time

[7] TMUBMUSD06M | U.S. 6 Month Treasury Bill Overview | MarketWatch

[8] For Diversification From Stocks, Cash Has Made a Good Case for Itself | Morningstar

[9] The highest-yielding money market funds to park your cash in

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.