Carry Never Takes a Holiday
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Article Type
Insights
Topic
Opinion
Published
August 03, 2026
Read time
5 mins
Authors
Ruari van Veen
Edwin Boon
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As many investors head into the summer holiday season, cash often remains an overlooked asset. Yet in today's market environment and in the current monetary hiking cycle, cash can still play an important role in generating income while maintaining a conservative risk profile. For investors seeking to put excess liquidity to work, now more than ever, euro money market funds offer an attractive combination of yield, diversification, and optionality.


High carry remains a powerful driver of returns

Now that central banks are tightening monetary policy, euro money market funds can reap the benefit from elevated short-term interest rates and attractive credit spreads. The result is a level of carry that remains compelling relative to many traditional alternatives, with relatively lower risk.


Carry is particularly valuable because it is earned simply through the passage of time. Investors are compensated through both interest accrual and the gradual roll-down of high-quality short-dated credit instruments. In a period when market volatility and geopolitical uncertainty remain elevated, this steady source of return can provide a welcome degree of predictability.

 

Limited interest rate sensitivity

One of the key characteristics of money market funds is their very low duration. With portfolio maturities typically measured in months rather than years, changes in longer-dated interest rates have only a limited impact on valuations.

 

This makes money market funds fundamentally different from traditional bond funds. While longer-duration fixed income portfolios can experience significant swings in value as rates move, the short-dated nature of money market investments means that net asset values remain relatively stable. As securities mature, proceeds can be rapidly reinvested at prevailing market rates.

 

Spread risk is often smaller than investors expect

Investors sometimes focus on the credit spread exposure of standard (VNAV) money market funds. While standard funds can experience modest mark-to-market movements when spreads widen, the high level of carry and rolldown available in today's market environment provides an important cushion.

 

Consider a representative VNAV money market fund with a spread duration of a year and a running yield of approximately 2.8% per year. If market credit spreads were to widen by 20 basis points, the immediate mark-to-market impact would be approximately -0.20%

 

However, a portfolio generating 2.8% annual carry earns roughly 0.23% per month. In this example, less than one month of carry would offset the entire spread widening shock. Next to that, the rolldown return obtained from upward sloping money market curves also provides a cushion. Assuming the yield of a euro money market securities at maturity is on average 2.5%, it means the rolldown of the fund is 0.3% per year, or 2.5 basis points per month.

 

Even under a larger 50 basis point widening scenario, the resulting mark-to-market impact of approximately -0.50% could be recovered with two months of carry accrual and rolldown, assuming spreads subsequently stabilize. In other words, while spread movements can temporarily affect valuations, the combination of short maturities, ongoing income generation and continuous portfolio turnover helps absorb market shocks over relatively short periods.

 

 

Source: Aegon AM, Bloomberg. Snapshot of fixed rate of €STR swap and forward rate of 3-month Euribor. Spread is estimated based on a smoothed weighted average per month of the constituents of the BBG Euro FRN 1-3year benchmark and is an approximation. Data as of 07-2026.  

 

Benefiting from rates before they rise

Carry can be particularly attractive during a rate hiking cycle. Standard VNAV money market funds typically invest further along the short end of the curve and target returns linked to 3‑month Euribor rather than overnight €STR. Because money markets tend to anticipate future ECB decisions, the expected path of policy rate increases are already priced into the money market curve and are reflected in portfolio yields before the hikes are formally implemented.

 

Combined with their modestly higher interest rate and spread duration, this allows VNAV funds to capture a higher level of carry than strategies focused solely on overnight rates, providing an additional source of income for investors.

 

Source: Aegon AM, Bloomberg. Historical time series of 3-month Euribor and €STR. Data as of 07-2026.  

 

A strategic home for liquidity

For many institutional investors, the objective of cash management is not merely capital preservation, but also the efficient generation of income without taking undue risk. Euro money market funds are designed precisely for this purpose.

 

As summer trading activity slows and investors take a well-earned break, money market funds can continue working in the background. Strong carry, low duration and limited sensitivity to spread volatility make them a potentially attractive destination for strategic cash allocations.

 

In a market where uncertainty remains high due to the conflict in the middle east, tariffs and other geopolitical risk, yields continue to offer meaningful compensation. Cash need not sit idly by in bank deposits (or short-term money market funds). For investors willing to look beyond overnight, euro money market funds may provide a compelling balance between return potential and risk control.

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. 
View profile
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