Beyond Overnight: The Role of Strategic Cash in Volatile Markets
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Article Type
Market Updates
Topic
Banks
Published
April 16, 2026
Read time
5 mins
Authors
Ruari van Veen
Edwin Boon
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Heightened geopolitical uncertainty has renewed the focus on cash as an active component of portfolio construction rather than a residual holding. Inflation risks have returned, especially as tensions in the Middle East have boiled over into conflict. In this environment, cash allocations are increasingly assessed not only on immediacy of liquidity, but also on their contribution to portfolio resilience, governance and yield stability.

 

Within euro cash allocations, a key distinction exists between Short-Term Overnight Money Market Funds, designed primarily for immediate liquidity, and Standard Money Market Funds, which are better suited to strategic cash positioning and provide additional yield.

 


The Role of Cash in a Portfolio

Cash serves several essential functions in a diversified portfolio. Beyond meeting short‑term liquidity needs, it provides optionality to deploy capital into risk assets during periods of market dislocation and liability management by ensuring that redemptions, margin calls, or any other liabilities such as insurance claims and benefit payments can be met.

 

From a governance perspective, holding a portion of liquidity in standardized money market funds can also simplify operational processes by reducing the need for frequent bank deposits, while improving transparency and daily risk monitoring.

 

It also acts as a risk‑diversification tool by limiting sensitivity to rising interest rates and market risk. In uncertain environments, cash preserves capital while allowing investors to wait for more attractive entry points across asset classes.

 

The contrast between holding duration and holding cash becomes more pronounced during periods of heightened inflation and rate‑hiking cycles. Duration‑heavy fixed-income assets are highly sensitive to rising yields, often resulting in mark-to-market volatility and capital losses. Cash, by contrast, has negligible duration risk, adjusts more quickly to higher policy rates, and preserves capital while allowing duration to be added later at more attractive yield levels.

 

Strategic Cash Versus Overnight Liquidity

A distinction can be made between Short-Term Money Market Funds and Standard Money Market Funds. Short-term funds prioritize same-day liquidity and are typically €STR‑based and designed to track overnight funding conditions. Standard Money Market Funds allow slightly longer maturities, thereby offering potential for higher yields. They are generally benchmarked to 3‑month Euribor and reflect unsecured term funding in the euro interbank market.
This positioning makes Standard Money Market Funds more suitable for strategic cash that is not required immediately, but within two business days1.

 

The decision to invest in a Standard over a Short-Term Money Market Fund is therefore a choice to give up a small amount of liquidity for a higher yield. There are three reasons why Standard Money Market Funds provide a higher yield than Short Term Money Market Funds:

 

  • Higher term premium: By investing modestly further out the curve, Standard Money Market Funds earn compensation for committing capital over a defined, short horizon. This additional return is structurally absent in overnight strategies.
  • Higher credit spread: Standard Money Market Funds are benchmarked to Euribor which embeds unsecured term bank credit and liquidity risk, to compensate for this risk it provides a modest spread pickup relative to overnight benchmarks. Additionally, investing in slightly longer dated securities provides a spread premium (in addition to the term premium).
    Under ESMA money market fund rules, Standard Money Market Funds can also invest in high quality floating‑rate notes with maturities up to two years, while maintaining very limited interest‑rate sensitivity. This allows investors to earn incremental spread without materially increasing risk.
  • Rolldown return from upward‑sloping curves: The current credit and short‑term yield curves are upward sloping, allowing instruments to benefit from rolldown as maturities shorten over time. This return component is not available in overnight strategies and can contribute meaningfully to total yield over time.

 

Apples to Apples Yield Comparison

Comparing the yield between Short-Term and Standard Money Market Funds can be like comparing apples to oranges. In the case of a rate cutting or hiking cycle, the 3-month Euribor will price in rate hikes or cuts in the upcoming three months, whereas with overnight funds the €STR will only be adjusted once a rate hike or cut has been actualized by the ECB, as shown in the chart below.

 

Source: Aegon Am, Bloomberg. Historical time series of 3-month Euribor and €STR. Data as of 03-2026.  

 

Compounding the return over time, the graph below shows that the higher yield produces a higher return for 3-month Euribor when compared to €STR. Because rate cuts were priced into the 3-month Euribor earlier, its yield dropped below €STR which in turn limited the excess return. During rate cutting cycles, €STR can provide a higher yield and return than 3-month Euribor, however this usually is for a short period of time. For strategic cash positions the choice for a Standard Money Market Fund that tracks 3-month Euribor has historically provided a higher (geometric) average return.

 

Source: Aegon AM, Bloomberg. Indexed compounded return of 3-month Euribor and €STR. Data as of 03-2026.  

 

To evaluate both rates on an equal footing, the current market pricing of an €STR interest rate swap with 3 months to maturity can be used. The difference in the fixed rate of the swap and the 3-month Euribor rate incorporates the difference in term risk (the opportunity cost of not being able to reinvest when interest rates move higher) for the same holding period and provides a proxy for the term premium. The below graph shows that this difference is on average positive, meaning that over the long term the benchmark yield of Standard Money Market Funds should be higher than that of Short Term Market Funds.

 

Source: Aegon AM, Bloomberg. Historical difference between 3-month Euribor rate and 3-month €STR swap. Data as of 03-2026.  

 

In addition to the term premium, Standard Money Market Funds receive also a higher spread premium for taking on slightly longer dated credit risk. This can be observed in longer dated credit spreads being higher than shorter dated ones. This allows for the locking in of higher spreads and obtaining an additional rolldown return, whereby both the spread and yield level of the money market security drop the closer it gets to its maturity. This too ensures that on average Standard Money Market Funds have a higher yield and return that their short-term counterparts.

 

Source: Aegon AM, Bloomberg. Historical time series of BBG Euro FRN 1mos-1-year and BBG Euro FRN 1-3year benchmarks. Data as of 03-2026.

 

This is clearly visible when evaluating the spread of euro money market securities ranked by their time to maturity. The graph below shows this for floating rate euro securities, where those maturing within 1 year can be invested in by Short-Term Money Market Funds. Standard Money Market Funds can invest in securities with a residual maturity of less than 2 years. The difference between these tenors is roughly 10 to 15 basis points on average.

 

Source: Aegon AM, Bloomberg.. Discount margin of constituents in the BBG Euro FRN 1-3year benchmark ordered by time to maturity. Data as of 03-2026.  

 

Concluding remarks

Both in stable and volatile markets, cash can be viewed as a strategic asset rather than merely a liquidity reserve. Cash helps manage duration risk, stabilize funding outcomes, and provides flexibility to redeploy capital. While Short-Term Money Market Funds are suitable for investors that have immediate liquidity needs, Standard Money Market Funds are suitable for investors that have a strategic cash allocation by enhancing return potential without compromising liquidity or capital preservation.

 

Choosing between these money market fund types can materially affect long-term returns, as even a small difference in yield can compound into meaningful return difference over time. The chart below shows the historical compounded returns of €STR and the AEAM Money Market Euro Fund (a Standard Money Market Fund). Over a 5-year period the difference in yield resulted in more than a 2% increase in gross return for the AEAM Money Market Euro Fund.

 

Source: Aegon AM, Bloomberg. Indexed compounded gross return of €STR and the AEAM Money Market Euro Fund. Data as of 03-2026.  

Sources

1The standard euro settlement cycle is expected to be shortened to 1 business day by the end of 2027 as part of CSDR reform.

 

Important information

Authors

Ruari van Veen
Portfolio Manager
Ruari van Veen is a portfolio manager with a focus on rates markets, including money markets, sovereigns and LDI portfolios.
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Edwin Boon
Portfolio Manager
Edwin Boon is a portfolio manager specializing in rates markets, including money markets, sovereign securities and LDI portfolios. 
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