Market review
At the beginning of the quarter, we felt there was an appetite for continued cuts on a quarterly basis. The Monetary Policy Committee (MPC) cut rates by 25 basis points in August, bringing the UK bank rate to 4%. While the move was not considered a surprise, it was widely viewed as a hawkish cut given the voting and subsequent commentary. By the September meeting, however, the MPC was more cautious, with sticky inflation, industrial action and a cooling labour market giving the Bank pause for thought in continuing its easing cycle.
MPC members remain divided on policy direction. Governor Andrew Bailey has suggested rate cutting is not over, but others see no changes until at least mid-2026. We believe there will be no further cuts this year, and that any further easing will be strictly data-dependent.
The market has retained some stability after the turmoil that followed ‘Liberation Day’, and UK markets benefited initially from US banks selling off. Overall, the market was largely flat, with limited opportunities to enhance returns.
Fund activity
Early in the quarter we found some attractive opportunities around ‘Liberation Day’, when we added US bank bonds at compelling levels, though those holdings matured in July. Recent purchases have focused on maintaining stability and quality while adding sovereign, supranational and agency (SSA) assets and covered bonds. We added Union Overseas Bank of Singapore two-year floating rate notes (FRNs) at SONIA +40 basis points, providing incremental yield without extending duration. We also purchased the Nedwater September 2026 bond, which offers returns above comparable commercial paper and deposits, while carrying a strong AA+ rating.
On the corporate side, we actively built a £10m position in Nestlé December 2025 bonds at a yield of 4.45%. After selling most of this holding at favourable levels, we reinvested into UK T-bills and covered bonds, moving up in credit quality from A+ to AAA while also improving the prevailing yield by 25 basis points.
Alongside this activity we have maintained a watching brief, in such a flat market. For now, we are building short and AAA-rated positions, with the aim of ensuring strong liquidity and stability in the fund.
Outlook
We anticipate a prolonged pause at 4% and remain cautious on the near-term outlook. While markets expect a single cut in early 2026, our base case is for no change this year. We believe there is a shift away from an environment of regular movements seen in the recent hiking and cutting pattern. Any adjustment to the cycle will be data-driven, and could result in multiple moves in either direction, depending on inflation, growth and fiscal developments. We’re cautious, but also opportunistic.
Our strategy remains focused on quality, liquidity and genuine value, rather than chasing yield and exposure for its own sake. We continue to favour SSA and covered bonds, supplemented by FRNs, while holding significant overnight and short-dated positions.
While the markets are pricing in one more cut, we buy only when assets reach the value we want. This barbell approach allows us to preserve capital and liquidity while staying flexible enough to respond to changing market conditions and capture opportunities when they arise. These may come from market dislocations, issuer-specific mispricings, or broader shifts in sentiment.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
The WS Canlife Sterling Liquidity Fund is a UCITS scheme and a standard variable net asset value (VNAV) money market fund (MMF). The MMF is not a guaranteed investment, nor does it receive external support to guarantee its liquidity. Unlike bank deposits, investment in MMFs can fluctuate and investors’ capital is at risk.
This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the literature section.
