Macro Theme : US Liquidity & Monetary Conditions

Synthesising Fed liquidity, money supply, SOFR positioning and real-rate signals.

Executive Summary

Current US monetary conditions present a mixed but predominantly easing picture, primarily driven by Federal Reserve actions to ensure ample liquidity. The Federal Reserve Liquidity Composite indicates an Expansionary regime (1), largely due to the significant decline in Overnight Reverse Repurchase Agreement (ON RRP) usage (5). Concurrently, M2 money supply growth has transitioned to a Bullish regime (2), indicating re-acceleration in broad money. However, this easing liquidity backdrop is juxtaposed against a Neutral real-rate regime (3), which has stabilized after a period of higher, more restrictive levels. SOFR futures positioning shows nuanced policy expectations: front-end (3m) futures indicate a balanced market with a slight long bias from speculators despite hedgers maintaining a "Deep_Short" stance (6), while medium-term (5y) futures also show speculative "Long_Build" with hedgers moving to a "Neutral" pressure regime (7). This combination points to an overall monetary environment that is easing from a restrictive stance, with market participants anticipating a less tight policy path.

• Fed liquidity condition: Expansionary (1)
• M2 regime: Bullish (2)
• Real-rate regime: Neutral (3)
• SOFR positioning tone: Front-end anticipates a less tight path with hedger deep short pressure (6); medium-term indicates speculative long build with hedgers neutral (7).
• Overall monetary tone: Net Supportive, moving from restrictive.

1. Federal Reserve Liquidity Dynamics

The Federal Reserve Liquidity Composite currently registers 1.78 for December 2025, classifying the regime as Expansionary, significantly above the 0.75 threshold (1). This strong expansionary signal is primarily driven by the substantial decline in Overnight Reverse Repo (ON RRP) usage, which showed year-over-year and three-month changes of -99.36% and -93.79% respectively as of December 2025 (5). This pronounced unwind in ON RRP is interpreted as a significant easing of liquidity. Conversely, components related to the Federal Reserve's balance sheet, such as total assets and reserve balances, continue to exert contractionary pressure. Federal Reserve total assets declined by -4.78% year-over-year, and reserve balances fell by -8.88% year-over-year in December 2025, both contributing bearish signals (4)(8). Despite these bearish contributions from the balance sheet, the strong bullish signal from ON RRP usage dominates, resulting in the overall Expansionary liquidity composite regime (1). The M2 money stock component, where data is available, has remained neutral, providing a stable contribution to the composite (2).

2. Money Supply (M2)

The M2 Money Stock signal currently indicates a Bullish regime, reflecting an expansion in broad money supply dynamics (2). As of October 2025, M2 year-over-year growth was 4.65%, and the three-month momentum was 1.22%. The Bullish classification is primarily driven by this three-month change exceeding the acceleration threshold of 1.0% (2). This represents a sustained transition from a previous period of contractionary money impulse observed through mid-2024. The current re-acceleration in M2 growth reinforces the easing stance suggested by the Federal Reserve Liquidity Composite, indicating a broader supportive trend in system-wide liquidity (1)(2).

3. Real Interest Rates & Policy Expectations

The US 10-year real yield signal is currently Neutral as of December 2025 (3). The latest real yield stands at 1.85%, which is within a tight range of its 6-month moving average trend of 1.86%. This indicates a period of stability in real interest rates, following a gradual decline in the trend since July 2025 from 1.981667% (3). The implied stance of monetary policy from this real-rate signal is currently neither strongly restrictive nor accommodative, having eased from a prior Bearish (tightening) stance observed earlier in the year. SOFR futures positioning reveals a nuanced view of policy expectations. In the front-end (3m SOFR futures), speculators hold a moderate net short position (-2.20% OI), while hedgers are net long (2.20% OI) as of December 9, 2025 (6). The speculative flow over the last four weeks shows a "Long_Build" of 2.30% OI, reducing net short exposure, suggesting a shift towards anticipating a less tight policy path. However, hedgers maintain a "Deep_Short" pressure regime, indicating their expectation for higher short-term rates or hedging against that risk (6). For medium-term policy expectations (5y SOFR futures), speculators are net long (15.40% OI), with hedgers net short (15.30% OI) as of December 9, 2025 (7). Speculative activity shows a strong "Long_Build" of 18.50% OI over four weeks, signaling increasing bullish conviction. Hedgers have shifted from a "Deep_Short" regime to a "Neutral" pressure regime, suggesting some easing of their extreme short bias (7). While speculative activity points towards a supportive outlook, the hedger positioning, though neutral now, indicates an underlying tension in conviction regarding the medium-term policy path, aligning with the real-rate regime's neutral stance but with a more pronounced shift in speculative long building.

4. Synthesised Monetary Regime

Integrating the current signals, the overall monetary regime can be classified as Easing Liquidity with Stabilising Real Rates and Shifting Policy Expectations. The Federal Reserve's active efforts to expand liquidity through ON RRP unwinds and future Treasury purchases, combined with re-accelerating M2 growth, create a supportive liquidity backdrop. Real rates have stabilized in a neutral stance, reflecting a balanced monetary policy impact. SOFR positioning indicates a market grappling with short-term tightening expectations from hedgers but with increasing speculative conviction for less restrictive conditions in both the near and medium term. This stance is predominantly supportive, signaling a proactive move away from prior restrictive conditions.

Pillar	Current Regime	Interpretation
Fed Liquidity	Expansion (1)	Net injecting of liquidity, supportive of financial conditions.
M2 Money Supply	Bullish (2)	Money supply growth re-accelerating, broadly expansionary.
Real Rates	Neutral (3)	Real yields stable and close to their medium-term trend, neither highly restrictive nor accommodative.
SOFR Policy Expectations	Balanced, Hedgers Deep Short (3m) (6) / Balanced, Hedgers Neutral (5y) (7)	Speculators leaning towards less restrictive policy, but hedgers maintaining caution on the front-end, with easing pressure medium-term.

5. Forward Risks

Easing / Supportive Risks

• Persistently positive liquidity impulse (e.g., continued ON RRP unwinds, larger-than-expected Treasury purchases) (1)(5).
• Stabilising or falling real yields from current neutral levels into accommodative territory (3).
• Continuation or re-acceleration in M2 growth beyond current bullish levels (2).
• SOFR positioning shifting towards a more accommodative policy path across both speculative and hedger segments, with a clear consensus on lower rates (6)(7).

Tightening / Reversal Risks

• Renewed increase in real yields above trend, signaling a return to restrictive monetary conditions (3).
• Reversal in ON RRP dynamics or renewed liquidity drain from other balance sheet components, moving the Fed Liquidity Composite back to Neutral or Contraction (1)(5).
• Deceleration or renewed contraction in money growth (M2), indicating a tightening monetary impulse (2).
• SOFR positioning moving towards more persistent tightness or reduced cut expectations, particularly if hedgers maintain or deepen their short positions (6)(7).

6. Investment Interpretation (Informational)

The current monetary regime, characterized by easing liquidity and stabilising real rates, typically influences funding conditions by making them more accessible and potentially lowering liquidity premia. In such an environment, the aggregate level of reserves and money supply tends to be supportive, reducing the cost of short-term borrowing and enhancing market functionality (1)(2). Valuation sensitivity in rates, credit, and risk assets generally responds positively to this combination of signals. Lower real rates, even if neutral, can be supportive of longer-duration assets, while an expansionary liquidity composite often correlates with reduced discount rates and potentially higher risk appetite (3). Credit spreads typically tighten, reflecting improved financial stability and lower default risk. For risk assets, the easing liquidity backdrop, coupled with speculative long positioning in SOFR futures, often translates into a more constructive environment, although the tension with hedger positioning suggests that conviction may still be tested by underlying policy uncertainties (6)(7).

Missing Content / Critical Improvements

• M2 Money Stock (M2_Value, M2_YoY, M2_3M) data for November and December 2025 are missing from the Federal Reserve Liquidity Composite table, limiting the ability to fully assess the M2 component's quantitative contribution to the latest composite value.
• Structured analysis for US Inflation & Price Dynamics, including explicit regime classifications and quantitative momentum assessments, is not provided, making it difficult to fully contextualize the inflationary pressures.
• Structured analysis for US Growth & Business Cycle, with explicit phase classifications and stall-speed risk metrics, is not provided, limiting the depth of economic activity assessment.
• Structured analysis for US Credit Conditions, with explicit regime classifications, is not provided, hindering a comprehensive understanding of financial stability and lending conditions.
• A comprehensive assessment of US Liquidity & Monetary Conditions beyond the composite, specifically regarding a detailed real-rate regime interpretation and the directional drift of the neutral rate (r*), is incomplete.
• Structured analysis for Cross-Asset Positioning & Sentiment, which would provide critical input for risk asymmetry and broader market sentiment, is not provided.