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Market Commentary

Brace for an unwelcome gift this year-end

As 2025 ends, US cash investors must prepare for lingering uncertainty from incomplete jobs data and unpredictable policy moves.

The US money markets have been juggling more moving parts than a Broadway stage crew this month. Repo markets remain the star of the show, with more and more collateral needing funding, cue the scramble for cash.

The Fed’s standing repo facility has seen some volume, as policymakers try to remove the stigma of tapping it. Still, the market rates are calling for more intervention and most likely the Fed will have to step in with temporary open market operations to smooth volatility.

Expect repo markets to normalize

A major contributor to this need for funding is quantitative tightening and that’s ending on December 1. The Fed will keep its balance sheet at its current size. It will continue to allow its MBS positions to roll off, approximately $15 bn per month, and it will take those proceeds and reinvest into the T-Bill market. This should provide some relief. As we head into December, expect normalization in repo markets, but don’t rule out a few dramatic scenes around year-end.

It appears the Federal Open Market Committee (FOMC) is poised to ease the policy rate by 25 bps at its December meeting—a move that would cap 2025 with a total of 75 bps of cuts and a more accommodative stance. However, the Fed would be making this decision without the benefit of October and November’s jobs data, as the Bureau of Labor Statistics is still playing catch-up from the shutdown. In other words, policymakers may have to fly blind if they proceed with the cut, relying on incomplete labor market signals and broader economic trends. This adds an extra layer of uncertainty to the outlook, even as markets broadly welcome the prospect of lower rates.

Strategically, we’re keeping things nimble and liquid—because, in December, flexibility is the ultimate gift. Weighted average maturity (WAM) remains neutral to slightly long, but we will be opportunistic where spreads offer value, particularly in short-dated paper that helps us navigate liquidity needs. We continue to prioritize high-quality issues and overnight instruments, ensuring the fund can handle any year-end surprises without breaking a sweat.

Liquidity management is front and center as we approach year-end, with repo market dynamics and client flows adding complexity. We are actively coordinating with clients on cash flows. Our approach is proactive, aiming to avoid last-minute scrambles and maintain strong liquidity buffers. In short, we’re planning ahead!

A new FOMC chair?

It’s possible we have the announcement of a new FOMC chairman as a holiday present. Treasury Secretary Scott Bessent is checking his list and there are a few front runners. By the time you read this we might know. Kevin Hassett appears to be in the lead, although in close chase is Chris Waller and Kevin Warsh. Also in the running are Michelle Bowman and the wild card, Rick Rieder. It’s anyone’s guess at this point as it will ultimately be up to the president to make the final call. Who knows what he will be feeling that day.