3. Capital markets: Liquidity overcomes tariff fears
Back in April, many feared that President Trump’s Liberation Day tariffs would derail debt capital markets (DCM) issuance. Instead, the opposite happened: markets delivered the tightest pricing levels and strongest execution in years.
This resilience was driven by two factors. Politically, the 90-day pause reassured investors in a more measured approach to negotiations. As the perceived scope of geopolitical risk narrowed – particularly around EU and China negotiations – confidence was boosted.
The dominant driver, however, was liquidity which was boosted by the repatriation of Chinese capital into Europe, surging hedge fund participation in European credit, and large investors reallocating from expensive equities into credit. With $7 trillion parked in US money market funds1, further rotation into longer-term credit remains possible as rates fall.
Issuers have responded decisively. Many used favourable conditions to pre-fund and reduce risk, with demand strongest in higher-yielding instruments. AT1 issuance rose nearly 25% year-on-year2, while Tier 2 bonds also attracted interest. Lower-beta segments such as covered bonds saw slightly lower supply as pure funding needs reduced.
Meanwhile, a more supportive regulatory environment is taking shape. Policymakers in the US, Europe, and the UK remain keen on stimulating economic growth and recognise that regulatory frameworks may have become overly burdensome and unnecessarily restrictive in some areas.
In the US, easing leverage ratio requirements could reduce banks’ long-term debt issuance needs while enhancing Treasury absorption. In the UK, raising thresholds for Minimum Requirement for Own Funds and Eligible Liabilities (MREL) could exempt smaller institutions from the need for costly issuance.
Synthetic risk transfer (SRT) has also gained momentum. By shifting risk weights to third-party investors, SRT frees up capital, supporting further lending and facilitating dividends. Investor demand is strong, given attractive yields.
While regulators caution that SRT transfers rather than eliminates risk, the market is still in its early stages with room for growth.
The outlook into 2026 is positive: investors remain resilient, and economic conditions in the US and Europe are broadly supportive. Risks linger around geopolitics, monetary policy, and fiscal pressures, but for now, liquidity continues to outweigh fear.
1: https://www.prnewswire.com/news-releases/money-market-fund-assets-reach-historic-high-at-7-26-trillion-302547835.html
2: Bloomberg
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