Decisions, dissents, delays and distortions

Market outlook

• Moving beyond the data delays and distortions in the fourth quarter from the U.S. government shutdown, we expect a modest number of rate cuts by the Federal Open Market Committee (FOMC or the Committee) to remain possible in 2026, with the timing dependent on indications of further softening of labor market conditions and an easing in inflation.
• Net Treasury Bill (T-bill) supply, we believe, is expected to rebound in the first quarter of 2026 following a contraction in December 2025.
• We believe actions by the Federal Reserve (Fed) to maintain an “ample” level of bank reserves may be supportive of funding conditions, although temporary instances of volatility may occur.

Q4 highlights

• The FOMC reduced the federal funds target rate by 0.25% at both its October 29 and December 10 meetings, bringing the range to 3.50% to 3.75%. There were dissents in favor of both a larger cut and no change in policy at each meeting.
• The statement¹ released in conjunction with the December FOMC meeting which reiterated that “job gains have slowed this year,” was updated to note that the unemployment rate has edged up through “September” and omitted its prior reference to the unemployment rate being “low.”
• Underscoring, in our view, a ‘data dependent’ stance going forward, the FOMC revised its guidance in December to note that “in considering ‘the extent and timing’ of additional adjustments to the target range for the federal funds rate,” it would continue to “carefully assess incoming data, the evolving outlook, and the balance of risks.”²
• The median federal funds rate forecast contained in the Summary of Economic Projections (SEP) for 2026,³ released in conjunction with the FOMC meeting, was unchanged from the 3.4% projection released in September 2025, implying in our estimation one additional cut of 0.25% in 2026.
• The updated SEP for 2026 reflected a higher economic growth forecast, an unchanged unemployment rate projection, and a modestly lower core inflation forecast relative to September 2025. Core inflation is still not projected to fall to the FOMC’s 2.00% objective until 2028.
• Regarding its balance sheet, the Committee noted following the December meeting that it would commence buying shorter-term Treasury securities (which we believe to be primarily comprised of T-bills) “as needed to maintain an ample supply of reserves on an ongoing basis.”⁴
• Net T-bill supply contracted in December but was up $150.48 billion during the quarter after rising in both October and November.⁵ This increase in supply contributed, in our view, to modest Reverse Repurchase Agreement Program (RRP) utilization, which averaged just $9.33 billion during the fourth quarter.⁶
• Assets across the U.S. money market fund (MMF) industry increased $368.07 billion during the fourth quarter. Assets of prime and tax-exempt MMFs increased by $10.77 billion and $10.89 billion, respectively, while government MMFs increased by $346.41 billion.⁷

Similar to the government money market fund (MMF) assets across the industry, BlackRock government MMFs experienced net inflows in the fourth quarter.

Following the Federal Open Market Committee’s (FOMC) consecutive rate cuts in October and December, short-term treasury rates were lower by the end the quarter. The 4-month T-bill ended the period 29 basis points (bps) lower at 3.64%.⁸ The 6-month T-bill ended the period 23 bps lower at 3.61%.⁹ The 12-month tenor decreased 20 bps, finishing the period at 3.20%.¹⁰

At the start of the quarter, the weighted average maturities (WAMs) in our government funds were near 45 days for repurchase agreement (Repo) eligible funds and 42 days for non-repo funds. By the end of the quarter, these figures were 43 and 41 days, respectively, with the team positioning portfolios for the evolving 2026 rate path.¹¹

Purchases throughout the quarter were mostly comprised of 1- to-6-month T-bills at average yields of 3.72% to 3.91%.¹²

Treasury issuance in the fourth quarter trended higher, including T-bills to date. Year to date, T-bill and coupon issuance hit $2.1 trillion of net supply. Supply was skewed towards coupons, with around $450 billion coming to market by the end of December. Additional projected issuance, we believe, is expected to be skewed towards coupons. Likewise, T-bill supply is expected to be robust in 2026 and 2027.¹³

The Secured Overnight Financing Rate (SOFR) remained subject to upside pressure in Q4 from a depleted RRP balance, a rising Treasury General Account (TGA) balance, and a decline in reserves at the Federal Reserve (Fed). The FOMC signaled at its December meeting that it would commence buying short-term Treasuries (with an emphasis on bills) to maintain an “ample” level of reserves.¹⁴ The reserve management purchases may support funding conditions, but volatility may persist due to dealer balance sheet constraints and structural collateral mismatches. SOFR ended the quarter lower at 3.89%.¹⁵

At quarter-end, trends on key economic data remained uncertain following the delay in release from the government shutdown early in the quarter. As of December month-end, markets were pricing in between two and three rate cuts for 2026; more than the median one rate cut projected in the latest Summary of Economic projections (SEP) . We remain cautious of a resumption in weakening economic data providing a catalyst for further monetary policy action. Supply remains elevated and strong demand continues. We are focused on maintaining the duration of our funds.

Consistent with the increase in assets of prime MMFs across the industry, BlackRock prime MMFs experienced net inflows during the fourth quarter.

We believe investors exhibited demand for prime funds to take advantage of the incremental yield and diversification. At quarter-end, the spread between institutional government and prime MMF yields was 0.18%, in line with historical averages.¹⁶

Tier 1 Commercial Paper (CP) outstandings increased by $3.4 billion to $397.2 billion during the quarter. As expected, CP rates continued to be repriced in line with expectations for the future path of monetary policy. Fixed rate investments with final maturities of 1 week to 1 year were added at yields of 3.90% to 4.29%. Floating rate investments with maturities of 3 months to 1 year were added at spreads of 0.17% to 0.50% over SOFR.¹⁷

Purchases during the period were primarily in certificates of deposits, time deposits, CP and overnight repo for eligible portfolios.¹⁸

Toward the end of the quarter, we added select fixed rate investments while the yield curve was relatively flat to take advantage of the higher yields available at longer maturities. We also continued to add floating rate securities that enhanced overall income. We maintained our positioning through select trades for the portfolios. At the end of December, our target WAM range was 35 to 40 days, and the funds had an average weekly liquidity of approximately 52%.¹⁹

We will continue to selectively add a mix of fixed and floating rate exposure as the Fed rate path continues to be reassessed by markets. Additionally, we believe there is a need for heightened geopolitical caution, and we remain selective when adding credit risk. Our funds aim to maintain current durations.

Tax-exempt money funds saw inflows for the fourth quarter, ending the period with $150.3 billion in industry assets, up from $139.4 billion at the start of the quarter and at the highest levels seen in a decade.²⁰ Total Variable Rate Demand Notes (VRDN) outstanding ended the fourth quarter around $106.3 billion as tax-exempt money fund industry assets continued to surpass VRDN supply.²¹

Ending 2025, VRDN new issuance stood at $20.8 billion, up 34% from the prior year issuance of $15.5 billion.²¹ In the secondary market, VRDN inventory held on dealer balance sheets averaged approximately $5.7 billion for the quarter, above the rolling 2025 average of $4.9 billion.²³

The Securities Industry and Financial Markets Association (SIFMA) Index, which represents the average yield on 7-day municipal floating rate debt, began the quarter at 2.89% and ranged between 1.92% and 3.32%, where it ended the period at 2.36%.²⁴

During this time, the SIFMA Index averaged 2.74%, above its average of 2.39% for the third quarter.²⁵ Looking ahead, we believe seasonable reinvestment flows early in the year may increase demand for VRDNs, which could put downward pressure on yields. If yields decline, investor activity and dealing pricing may adjust over time, though outcomes remain dependent on evolving marketing conditions.

MuniCash remained positioned in the 5- to 7-day WAM range during the fourth quarter with high levels of daily and weekly liquidity, as the Fund intends to invest solely in securities that are considered weekly liquid assets as defined in Rule 2a-7 under the Investment Company Act of 1940, as amended (the 1940 Act).

Though MuniCash intends to invest only in weekly liquid assets, for broader market color in the fixed rate space, 1-year municipal bond yields increased from 2.38% to 2.46% while 1-year municipal note yields increased from 2.46% to 2.59% over the quarter.²⁶ Though overall annual note issuance remains lower than pre-pandemic levels, issuance increased by approximately 8% to $34.6 billion in 2025.

In contrast with the theme across the ultra-short bond industry, the BlackRock Short Obligations Fund experienced net outflows in the fourth quarter.²⁷

Tier 1 Commercial Paper (CP) outstandings increased by $3.4 billion to $397.2 billion during the quarter. Additionally, since the end of the third quarter, Tier 2 CP outstandings increased by $4.2 billion to $100.1 billion in December. Asset-Backed Commercial Paper (ABCP) outstandings increased by $26.2 billion to $428.3 billion.²⁸

Yields in the Investment Grade (IG) space were slightly volatile throughout the quarter, with the yields on the JULI All Ex EM 1- to 3-year Index ranging between 4.02% and 4.24%, ending the period lower following rate cuts in October and December.²⁹

Investment Grade spreads traded in a tight 9 bp range throughout the quarter and continue to remain tight at the quarter-end.³⁰ Compared to 10-year averages, spreads continued to remain historically tight largely due to strong demand continuously outpacing IG supply. IG yields during the quarter moved largely in line with rates and ended December lower as market expectations for rate cuts remained elevated for 2026.

Fourth quarter IG issuance remained strong with over $331 billion coming to market. Overall, investors continue to assess the Federal Reserve’s path of monetary policy and the outlook for economic growth.³¹

Throughout the quarter, our focus was keeping the fund well positioned by focusing purchases on fixed and floating CP maturing between 1-week and 12-months at yields ranging from 3.97% to 4.38%. Other investments consisted of fixed and floating corporate bonds with maturities of 1 to 2-years+ with yields ranging from 4.21% to 4.73%, and ABS with weighted average life (WAL) of 1-year at average yields ranging from 3.97% to 4.00%.³²

At the quarter-end, markets were pricing in around two to three cuts over the balance of 2026, but expectations continue to remain contingent on inflation data following the implementation of tariff policy, employment data, and the trajectory of economic growth. In IG, with growing uncertainties in the United States and abroad, we remain selective when adding credit risk.