Liquidity lowdown: The year in review and what lies ahead for money market funds in 2026

December always feels like a good time to take stock of the year’s events and reflect on a few areas that have affected cash markets throughout the year. And perhaps more importantly, to look forward to 2026 and understand how any developments may affect money market funds (MMFs) and their investors.

Taking stock of 2025: the year of cash

Repo spikes became more prominent. Repo spikes in 2025 signalled temporary stresses in funding markets where there is an imbalance between the demand and supply of cash. Spikes at month end have been caused by large gilt redemptions, or by liquidity drainage from the repayment of pandemic-era Bank of England Term Funding Scheme (TFSME) loans. These spikes made the cost of borrowing overnight cash more expensive by up to 10 basis points, but money market funds (MMFs) who predominantly lend cash to banks have benefitted from these sudden, albeit temporary, spikes in yields. Clearly, these events are not too commonplace but MMFs will certainly take advantage of them when they arise, by increasing their allocation of cash to secured reverse repo.

Yields on MMFs remain high and are not falling as quickly as the market once thought.

Yields on MMFs remained attractive. In our view, yields on MMFs are still highly attractive, especially on a risk-adjusted basis. Inflation has persisted for much of 2025 but there are signs of pressures easing with CPI inflation falling to 3.6% from 3.8% in October 2025. Although inflation is expected to fall close to 3% in early 2026 due to lower energy bills and falling food prices, it is still uncomfortably high for the Bank of England (BoE). However, persistent inflationary pressures, despite having a negative impact on the economy and consumer, do mean that yields on MMFs continue to remain high and are not falling as quickly as the market once thought, making cash and near-cash a compelling asset class throughout 2025, and into 2026.

Continued uncertainty played into the hand of cash investors. Uncertainty been undeniably a key theme throughout 2025. Persistent geopolitical tensions, fiscal uncertainly, and economic data has continued to drive investors towards the safe haven of cash assets. Unrelated to other assets classes, MMFs have seen strong inflows for much of 2025. MMFs have historically been used as a way for investors to manage their day-to-day cash requirements, but with current yields close to 4%, we feel they should also be seen as a credible asset class in their own right. 

Looking ahead to 2026…

Regulatory changes are coming, potentially. The financial industry never seems far away from evolving regulations aimed at strengthening underlying markets. The Financial Conduct Authority (FCA) has proposed changes to the minimum level of liquidity that all MMFs must hold. In addition, it proposes changes to remove an existing regulatory requirement linking the level of liquid assets with the need to impose tools that would reduce the ability for investors to access their money back without delays of losses. In our view, forcing MMFs to hold additional liquidity buffers may actually lead to market illiquidity, effectively shrinking the proportion of a MMF which can be bought and sold. The proposed changes, if any, are yet to be clarified by the FCA but MMFs have remained resilient throughout recent stress events, at current liquidity levels.

Tokenisation is set to be one of the most exciting developments in 2026 with the potential to transform how investors benefit from MMFs.

Tokenisation is emerging. Tokenisation is starting to transform MMFs by utilising blockchain technology to digitise fund units, enabling real time settlement, transparency and 24-7 trading without intermediaries. This innovation reduces transaction costs, supports fractional ownership, and broadens investor access. MMFs have already started to embrace this technology, with an increasing number of MMFs adopting this innovative approach and launching tokenised, a share class of an existing MMFs. Tokenisation is set to be one of the most exciting developments in 2026 with the potential to transform how investors benefit from MMFs.

Strategic positioning. MMFs will always play a key role in managing daily liquidity, but for those with slightly longer investment horizons and a slightly higher risk appetite, longer-term cash or cash-plus strategies can be an effective tool. Utilising a combination of these strategies can potentially provide an attractive risk-adjusted yield with high levels of liquidity and security. Once an asset class overlooked, we feel cash and liquidity solutions add real value to any portfolio.

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.