Whale Research Analysis: Market Outlook 2026 On Liquidity, Expectations, And The New Market Order

What Happened

For global investors, 2025 was one of the most undercurrent-filled years of the 21st century. Unlike the bursting of the dot-com bubble in 2001 or the global financial crisis in 2008, markets in 2025 did not experience a prolonged, large-scale liquidation cycle or a “storm-like” sequence of relentless crashes.

Against that backdrop, liquidity allocation has become less concentrated in equities and bonds than it once was. Commodities, FX and rates attracted greater attention in 2025. At the same time, investors have been steadily reducing leverage and trimming exposure to higher-risk assets—one of the direct reasons the crypto bull market ended in Q4 2025.

At the start of 2025, one major “bullish” factor in investors’ minds was Donald Trump’s formal inauguration. The prevailing view was that Trump would trigger more rate cuts, inject more liquidity into markets, and drive asset prices higher.

Indeed, between September and December 2025, amid “concerns about a weakening labour market”, the Federal Reserve delivered three “defensive” rate cuts and, in December, announced the end of quantitative tightening. But this did not produce the liquidity flood investors had hoped for.

Notably, even after the Fed stopped shrinking its balance sheet, the SOFR–IORB spread did not fall sharply in January. One plausible explanation is that, during 2025, banks deployed a significant share of their liquidity buffers into financial investments rather than extending credit to the commercial, industrial, and real estate sectors.

Over the past year, commercial and industrial lending contracted meaningfully versus 2024, and consumer credit showed similar weakness. By contrast, VettaFi data suggest that margin debt rose 36.3% over the past year, reaching an all-time high of $1.23T in December 2025, while investors’ net debit balances also expanded to $ -814.1 billion—broadly matching the pace of margin debt growth.

This is not benign: a rising share of T-bills in total government debt often signals deteriorating sovereign credit perceptions. As investors begin to doubt a government’s repayment capacity, they may become less willing to buy long-dated bonds at relatively low yields.

To reduce debt-servicing pressure, the government leans more heavily on T-bill financing—raising the T-bill share further and reinforcing investor doubts in a vicious cycle.

So, in this macro context, how have investors’ expectations and portfolios changed?

Market Context

So, where do markets go in 2026? As in 2025, implied expectations embedded in derivatives-market data have already offered an answer.

Liquidity: Not Abundant

From October 2025 onwards, the Effective Federal Funds Rate (EFFR) gradually moved towards the midpoint of the “rate corridor”. In the following months, EFFR crossed that midpoint and drifted towards the upper bound of the corridor—hardly a sign of easy liquidity.

EFFR is the core short-term market rate in the US. It reflects funding liquidity conditions in the banking system and how the Fed’s policy stance (hikes or cuts) is transmitted in practice. In relatively loose-liquidity regimes, EFFR tends to sit closer to the lower end of the corridor, as banks have less need for frequent overnight borrowing.

In the final months of 2025, however, banks clearly faced liquidity tightness—a key driver of the rise in EFFR.

The SOFR–IORB spread further highlights the degree of stress. If EFFR primarily reflects cash-market conditions, SOFR, secured funding collateralised by US Treasury securities, captures a broader liquidity shortage. Since October 2025, SOFR has remained above the Interest Rate on Reserve Balances (IORB), indicating that banks have been willing to pay a higher rate premium to “bid” for liquidity.

As liquidity requirements grow to push markets higher, the banking system is showing signs of strain, and demand for short-term funding has increased. The fix is straightforward: either reduce margin lending and pull liquidity back, or obtain liquidity support from the Fed and the repo market.

As a result, in 2025 alone, the repo market expanded from roughly $6T to more than $12.6T—over three times its size during the 2021 bull market. In 2026, repo may need to expand further to support equity-market performance.

A higher T-bill share has another consequence: liquidity dynamics become less stable. Since a large portion of the liquidity supporting equities is channelled via repo, a greater reliance on T-bills implies more frequent rollovers and a shorter average liquidity “life”.

With overall leverage and margin debt already pushing beyond historical peaks, more frequent and more violent liquidity swings weaken the market’s shock-absorption capacity—setting the stage for potential cascading liquidations and large price moves.

In short: the quality of USD liquidity deteriorated markedly in 2025, with no clear sign of improvement so far.

Why It Matters

For the economy as a whole, the first option is preferable—lower system-wide leverage and strengthen resilience in banks and the financial system—but it would also imply lower valuations and a sharp equity sell-off. Given the midterm-election backdrop, the White House is unlikely to accept that path.

Risk Premia and “Strict Diversification”

Details

Yet it is clear that, amid geopolitical uncertainty, uncertainty over US fiscal and monetary policy, uncertainty across multiple countries’ economic fundamentals, and the ebbing of globalisation in favour of regionalisation, equities, bonds, commodities and crypto have all been pricing in a future that is more cautious and more defensive.

Repo transactions typically use US Treasuries—“high-quality assets”—as collateral. Historically, Treasury notes (T-notes) have been the most important form of collateral. But since mid-2023, that has changed, in part because the issuance and outstanding stock of Treasury bills (T-bills) has increased in an “exponential” fashion.