Macro backdrop boosts options for UK liquidity funds

An uncertain global and UK macroeconomic backdrop should keep the yield curve positive and improve the opportunity set for sterling money-market funds.

• Bond markets sold off sharply as oil prices and inflation rose, with the UK 30-year gilt yield reaching 5.9% in mid-September, its highest level in almost two decades.
• Brent crude rose above $100 a barrel after an escalation in the Middle East, while UK CPI accelerated to 3.1% in August and eurozone CPI to 3.3%.
• The ECB and Federal Reserve raised rates in September, the Bank of England held rates on 17 September, and markets priced four 25-basis-point UK rate increases by the end of next year.
• Higher gilt yields pushed UK government debt-interest payments to £8.8bn in August, while the government's fiscal buffer was estimated to have fallen to about £12bn ahead of the 28 October Budget.
• Weak UK growth, rising energy exposure and fiscal pressure are expected to sustain a positive yield curve, while UK money-market fund assets reached £275.6bn at the end of August.

Takeaway: The environment may support AAA-rated sterling money-market funds through higher short-term yields and a broader set of acceptable issuers, although capital preservation, liquidity and the ability to adjust duration remain central considerations.