An oddly quiet year end
Front-end markets ended 2025 in rare calm, with tight spreads and steady ABCP pricing. As supply constraints loom and Fed policy evolves, tactical entry points and extensions remain key.
US front-end markets closed the year in an unusually orderly fashion—which, in money-market terms, is a bit like turbulence-free airspace in December: appreciated but treated with suspicion. Year-end funding needs were completed, and activity shifted to day-to-day liquidity management, with little urgency evident as we rolled through year-end. It was exceptionally quiet. Unlike prior years, term spreads have avoided the significant seasonal widening.
Asset-backed commercial paper (ABCP), in particular, failed to cheapen meaningfully, reflecting stronger balance sheet capacity and a notable absence of forced cash movements. While there were a few large prints, the overall tone has been steady rather than desperate, a meaningful change for investors accustomed to year-end funding drama.
Looking ahead, supply constraints are likely to drive incremental spread tightening in the new year, particularly in the 3–9-month sector. Early visibility into 2026 funding calendars suggests a relatively benign environment, aside from the seasonal patterns, encouraging selective extension further out the curve. Interest in ABCP remains strong, especially collateral programs (repo). Optimism is not exuberance—but in front-end markets, “functional” is high praise.
Treasury bill markets remain well bid, though positioning continues to be highly tactical and resolutely month-to-month. Issuance volumes have been substantial, and we expect continued net bill supply even outside of the typical Q1 seasonal dynamics tied to tax refunds and April tax receipts. Dealers remain active, with desks regularly soliciting bids, suggesting no one ever quite feels “long enough” bills.
Looking ahead, the US Federal Reserve’s new Reserve Management Program could become a meaningful source of incremental T-bill demand in the new year. With the Fed’s Standing Repo Operations firmly embedded in the toolkit, and reserves, repo rates, and bill supply all interacting dynamically, the funding landscape has plenty of moving parts. Conditions remain orderly for now—but this is money markets, so vigilance remains mandatory.
From a policy perspective, inflation remains sticky enough to keep the Fed firmly in wait-and-see mode, while tariff uncertainty continues to loom in the background like an unresolved footnote. The labor market is more of a concern than it had been and a close read of the December jobs data will be telling.
In our Global Market Outlook we continue to expect a resilient but moderating US economy, with policy rates remaining restrictive for longer but gradually moving toward easing as inflation trends lower. We expect the next cut to come at the April Federal Open Markets Committee meeting, with two more after that. This is a more dovish view and one we think critical for our growth forecast (2.3% YoY GDP 2026). That backdrop for money markets reinforces the appeal of front-end carry, though entry points matter.
In the near term, we continue to favor the 4-month sector and one-year maturities north of 3.50% offer good value. We remain disciplined with our entry points, balancing income with flexibility.