J.P. Morgan published "Short-Term Fixed Income 2026 Outlook" recently, which explains, "[W]ith rates still well above 3%, cash has continued to pour into MMFs. Inflows have persisted even as the Fed cuts rates, supported by interest reinvestment, an inverted yield curve, persistent market volatility, and potentially AI-related debt raises with proceeds not yet fully deployed. MMFs have remained a preferred haven for investors seeking stability, yield, and a place to park liquidity, pushing AUMs up $736bn (or 10%) to north of $7.8tn YTD." (Note: Thanks to those who attended our Money Fund University in Pittsburgh last week! Attendees and subscribers may access the conference materials via our "Money Fund University 2025 Download Center.")
JPM tells us, "In 2026, we expect the Fed to cut twice more, in January and April, before going on hold, for a terminal fed funds range of 3.25-3.50%. Although MMF yields will fall commensurately, MMF AUMs are expected to continue their upward trend, albeit at a slower pace than this year, and are likely to surpass $8tn. Stablecoin balances should also continue to grow, and while it's hard to predict approximate growth next year, we think another $90-100bn increase (similar to this year) is a reasonable base case given recent momentum following passage of the GENIUS Act and related developments in agentic commerce, cross border payments, etc."
They write, "On the supply side, we expect money market supply to increase by roughly $1.1tn (6%) to $20.3tn in 2026, primarily driven by repo (~$500bn) and T-bills ($488bn). Credit supply should remain stable. Against this backdrop, with reserves consistently below $3tn and ON RRP levels hovering near zero, even with QT ending, we expect funding markets to become more volatile, more sensitive to structural pressures, and more closely watched as a barometer of financial plumbing. SRF efficacy is critical, and in the absence of that, we must consider what else the Fed could do to stabilize the funding markets. GC/OIS spreads should remain wide as repo rates continue to trade firm next year, which could drag CP/CD spreads wider as well, on the margin."
A section titled, "Funding markets: we’re not in Kansas anymore," states, "Meanwhile, the ON RRP facility has dwindled to negligible levels, no longer being the shock absorber it was in recent years.... Banks, historically the marginal providers of financing, are constrained by a multitude of factors that banks must overcome before the risk-reward justifies deploying their excess reserves into the repo market. In that sense, there is non-linearity in their engagement in the repo markets -- that is, it is not as simple as banks expecting repo to trade 5-15bp above IORB."
It says, "The collapse of SVB and the subsequent FHFA guidance against relying on FHLB advances for funding have further reinforced banks' preference for holding reserves versus alternative assets. Furthermore, the distribution of reserves has become more uneven as reserves have declined, exposing frictions in money market plumbing (i.e., reserves are not necessarily making their way to those that need them). Timing is a key challenge. The repo market operates primarily in the early morning, leaving a very narrow window for liquidity redistribution."
The outlook continues, "Growth in taxable MMF and stablecoin balances should continue to be supportive of the front-end, but funding pressures will persist amid another year of growth in net T-bill and repo issuance, highlighting the Fed's need to further address conditions in the money markets. On the demand side, MMF balances have risen impressively this year (+$736bn YTD to $7.8tn) and are likely to surpass $8tn in 2026.... While MMF yields are expected to decline, they should remain above 3%, keeping cash as a competitive asset class and limiting the risk of significant outflows."
It explains, "Retail investors, who are more sensitive to interest rates, do present some vulnerability. However, our analysis shows that retail investors are not overallocated to cash: MMFs only account for less than 20% of mutual fund assets, compared to over 60% in equities and 20% in bonds. This contrasts with the 2009-2012 period, when MMFs comprised 40% and prompted a major rotation into riskier assets. Therefore, the need for portfolio rebalancing is not immediately apparent.... Additional factors such as record high equity markets, an aging U.S. population, and increased allocations to alternatives also support higher cash balances."
JPM says, "Meanwhile, institutional investors should continue to use MMFs for cash management and liquidity purposes, prioritizing capital preservation over yield. As bank deposits still yield well below MMFs and the yield spread between cash and bonds remains flat, there is little incentive to extend duration. Not to mention, ongoing AI-related debt raises may result in a portion of these proceeds temporarily flowing into MMFs, further supporting AUM growth. Our corporate credit research team anticipates that global data center buildout will continue, with $700bn in funding for 2026, supported by hyperscaler cash flow and high-grade bond markets.... Overall, while MMF balances are elevated in nominal terms, these factors suggest there is still room for growth. MMFs currently represent 24% of GDP and 41% of deposits, which is high but not unprecedented."
They add, "With respect to stablecoins, this market currently stands at around $300bn, having grown by about $90bn this year, and should continue to expand. While it is difficult to predict approximate growth in 2026, another $90-100bn increase is a reasonable base case, given recent momentum following passage of the GENIUS Act and related developments in agentic commerce, cross border payments, etc. More optimistic growth will depend on resolving issues around singleness of money, interoperability, redemption rights, liquidity and counterparty risks, consumer protections, among others. The development of infrastructure connecting the digital ecosystem to traditional banking (the 'rails') will also be crucial. Offsetting this growth are developments around tokenized deposits and tokenized MMFs (i.e., other forms of digital 'cash' competing with stablecoins), and FedNow, a platform that enables instant payments without blockchain rails."
Finally, the piece summarizes, "Yet, despite growth in MMFs and stablecoins, overall money market supply (ex-Fed) is projected to increase by about $1.1tn (6%) to $20.3tn in 2026, outpacing expected demand.... While this is not as large an increase as seen this year, it remains a meaningful amount of supply for the money markets to digest. The primary driver will be repo, with dealers needing to finance an additional $500bn in collateral, particularly in Treasury repo, as our Treasury strategists estimate $1.5tn in net coupon issuance for 2026. This continues the rapid growth in Treasury collateral financing seen this year, as reflected in SOFR volumes as a percentage of total Treasury debt outstanding, which rose by 2%-pts to 11%.... That growth has been supported by MMFs, who remain the dominant lenders in the repo market, increasing their repo allocation by 3.3%-pts to 35% of total portfolios year-to-date through October, or up by nearly $500bn."
