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September 17, 2020

Central Banks Continue to Hold, but Ready to Act

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September 17, 2020

Central Banks Continue to Hold, but Ready to Act

Market Insights

Central Banks Continue to Hold, but Ready to Act

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September 17, 2020


 Federal Reserve Board

The Federal Open Market Committee (FOMC) did not formally meet in August, but Chairman Powell did speak at the annual Jackson Hole symposium. As expected, he reaffirmed the belief that rates would be lower for longer and monetary policy would not stifle any potential recovery. Going forward, the Fed plans to let inflation run higher utilizing an “average inflation targeting” approach. This significant change in policy means inflation will be allowed to run “moderately” higher “for some time” before eliciting any potential rate hike. In addition to the aforementioned policy shift, Chairman Powell plans to modify the Federal Reserve’s employment mandate to become more “inclusive” which suggests a greater focus on targeting lower income earners. The FOMC meets on September 16, 2020, which many anticipate will clarify the policy changes referenced at Jackson Hole.

European Central Bank

While no formal policy meeting was held in August, market participants and analysts expect the European Central Bank (ECB) to keep rates and stimulus unchanged. The ECB’s next meeting on September 10, 2020 is highly anticipated, considering the unprecedented policy actions taken by central banks around the world.

Bank of England

The Bank of England (BoE) Monetary Policy Committee (MPC) met in August and voted unanimously to maintain the Bank Rate at 0.10%. In addition, the MPC voted unanimously to maintain its U.K. government bond purchase programs. The MPC illustrated a more optimistic view on the economy as its witnessed improvements in spending, household consumption and the housing market. It also noted global consumption had improved from the lows brought upon by COVID-19. While the BoE kept rates and stimulus unchanged, the Committee “will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit.”

Portfolio Strategy


The ECB’s pandemic response, including a new and improved targeted longer-term refinancing operation (TLTRO) in June, added a huge amount of excess liquidity to markets and provided funding to the majority of banks at -1%. Given this huge increase in funding provided to banks, the wholesale money markets have responded with an aggressive flattening of the yield curve. The Fund has therefore continued to look for opportunities in longer dates, while maintaining a large allocation of weekly liquidity eligible assets. These higher-rated assets have been complemented with increasing the allocation to covered bonds, as credit markets continue to provide better value than money markets. Therefore, WAM has continued to be traded at the longer end of our target range, around 50 days; however, with the growth of the Fund towards the end of the month, this fell to the mid- to low-40s. Our WAL continues to trade close to the WAM, given a lack of floating rate opportunities in the deeply negative-yielding euro space.

Display 1: Overnight Rates

Source: Bloomberg




With the MPC meeting leaving interest rates unchanged and seemingly rejecting the use of negative interest rates for the foreseeable future, the Fund continued to seek opportunities in longer dates where possible, keeping the WAM of the Fund at the longer end of our target range at about 50 days. With the Fund size continuing to grow, moving from £4.26 billion to £4.92 billion intra-month, this has meant a slightly increased percentage in overnight securities due to the lack of yield available in a flat yield curve. This higher level of overnight securities was normalised at month end with our normal cyclical outflows. We continue to wait for better opportunities in sterling markets, as the increase in excess liquidity across wholesale markets continues to have a suppressing impact on money market yields.


Minutes from the July FOMC meeting and comments from Chairman Powell at the annual Jackson Hole symposium cemented the notion that rates will remain on hold for the next few years. With a flat yield curve and spreads remaining tight on the short end of the curve, we predominantly purchased securities that mature inside of year-end, allowing the weighted average life of our portfolios to gradually roll down to approximately 60 days as of the close of the month. Three-month LIBOR held relatively static month-over-month, but was still setting well above where most banks are transacting in the wholesale commercial paper/certificates of deposit market. We remain comfortable managing the portfolios with elevated levels of liquid assets, ensuring that we uphold our mandates of capital preservation and liquidity.

Display 2: LIBOR Rates

Source: Bloomberg

Display 3: Yield Curves

Source: Bloomberg




The stalemate in Congress over the details of a new stimulus package continued throughout the month of August. As no agreement materialized, net Treasury bill pay-downs continued during the month, putting some downward pressure on short yields. Overall, the Treasury bill curve remained flat, with longer yields largely unchanged. We anticipate more Treasury bill supply, but the timing is dependent on the passage of another package. Overnight repurchase agreement rates softened somewhat during the month as we continued to invest in fixed-rate Treasuries largely up to six-month maturities. We continue to ensure high levels of liquidity and manage the portfolios to be responsive to changes in market conditions and interest rate levels.

12 Month Performance Periods to Latest Month End (%)

Past performance is not a reliable indicator of future results. The net performance data shown is calculated net of annual fees. The sources for all performance and Index data is Morgan Stanley Investment Management. Please visit our website to see the latest performance returns for the fund’s other share classes.

The Global Liquidity team aims to effectively meet clients’ unique cash and working capital needs, offering a broad range of money market funds, ultra short bond funds and customized separate account solutions.

The risk and reward category shown is based on historic data.

•    Historic figures are only a guide and may not be a reliable indicator of what may happen in the future.

•    As such this category may change in the future.

•    The higher the category, the greater the potential reward, but also the greater the risk of losing the investment. Category 1 does not indicate a risk free investment.

•    The fund is in this category because it invests in money market securities and the fund’s simulated and/or realised return has experienced low rises and falls historically.

This rating does not take into account other risk factors which should be considered before investing, these include:

•    The value of bonds are likely to decrease if interest rates rise and vice versa.

•    Issuers may not be able to repay their debts, if this happens the value of your investment will decrease. This risk is higher where the fund invests in a bond with a lower credit rating.

•    The fund relies on other parties to fulfill certain services, investments or transactions. If these parties become insolvent, it may expose the fund to financial loss.

•    While it is intended that the distributing share classes will maintain a share price of €1/$1/£1 this may not be achieved due to the creditworthiness of the issuers of investments held or changes in interest rates.

Past performance is no guarantee of future results.

Please refer to the Prospectus for full risk disclosures. All data as of 30 September 2019 and subject to change daily.


One week Euro LIBID Index – One week London Interbank Bid Rate - The average interest rate which major London banks borrow Eurocurrency deposits from other banks. One Month Euro LIBID Index – One month London Interbank Bid Rate - The average interest rate which major London banks borrow Eurocurrency deposits from other banks. Euro Overnight Index Average (EONIA) – the standard interest rate at which banks provide loans to each other with a duration of 1 day within the Eurozone. FTSE 1 Month Treasury Bill Index – index calculated by FTSE that is an average of the last one month Treasury bill month-end rates. One Week USD LIBID Index – 1 week London Interbank Bid Rate - The average interest rate which major London banks borrow deposits from other banks. One Month USD LIBID – 1 month London Interbank Bid Rate - The average interest rate which major London banks borrow deposits from other banks. FED Funds – excess cash reserves that commercial banks and other financial institutions deposit at regional Federal Reserve banks; these funds can be onward lent to other market participants with insufficient cash on hand to meet their lending and reserve needs. One Week GBP LIBID Index – 1 week London Interbank Bid Rate - The average interest rate which major London banks borrow deposits from other banks. One Month GBP LIBID – 1 month London Interbank Bid Rate - The average interest rate which major London banks borrow deposits from other banks. SONIA – the standard interest rate at which banks provide loans to each other with a duration of 1 day within the Sterling market.


Public Debt Constant Net Asset Value (CNAV) MMF – a MMF qualifying and authorised as a Public Debt CNAV MMF in accordance with MMF Regulation which seeks to maintain a stable NAV and invests 99.5% of its assets in money market instruments issued or guaranteed by sovereign entities, reverse repurchase agreements secured with government debt and cash. Low Volatility Net Asset Value (LVNAV) MMF – a MMF qualifying and authorised as a LVNAV MMF in accordance with MMF Regulation which seeks to maintain a stable NAV under the condition that the stable NAV does not deviate from the NAV per Share by more than 20 basis points. In case of a deviation of more than 20 basis points between the stable NAV and the NAV per Share, the following redemption or issue of Shares shall be undertaken at a price that is equal to the NAV per Share.


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This document contains information relating to the sub-fund (“Fund”) of Morgan Stanley Liquidity Funds, a Luxembourg domiciled Société d’Investissement à Capital Variable. Morgan Stanley Liquidity Funds (the “Company”) is registered in the Grand Duchy of Luxembourg as an undertaking for collective investment pursuant to Part 1 of the Law of 17th December 2010, as amended. The Company is an Undertaking for Collective Investment in Transferable Securities (“UCITS”).

The Funds are not a guaranteed investment and are different from an investment in deposits. The Funds do not rely on external support for guaranteeing the liquidity of the Funds or stabilising the NAV per share. The value of investments and the income from them may go down as well as up and you may not get back the amount you originally invested.

The Funds are authorised to invest up to 100% of their assets in Money Market Instruments issued or guaranteed separately or jointly by a Sovereign Entity and by any other member states of the OECD and their central authorities or central banks subject to certain conditions. Please see Prospectus for further details.

Applications for shares in the Funds should not be made without first consulting the current Prospectus, Key Investor Information Document (“KIID”), Annual Report and Semi-Annual Report (“Offering Documents”), or other documents available in your local jurisdiction which is available free of charge from the Registered Office: European Bank and Business Centre, 6B route de Trèves, L-2633 Senningerberg, R.C.S. Luxemburg B 29 192.

Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The views and opinions expressed are those of the portfolio management team at the time of writing/of this presentation and are subject to change at any time due to market, economic, or other conditions, and may not necessarily come to pass. These comments are not representative of the opinions and views of the firm as a whole. Holdings, countries and sectors/region weightings are subject to change daily. All information provided is for informational purposes only and should not be deemed as a recommendation to buy or sell securities in the sectors and regions referenced. Information regarding expected market returns and market outlook is based on the research, analysis, and opinions of the team. These conclusions are speculative in nature, may not come to pass, and are not intended to predict the future of any specific Morgan Stanley Investment Management investment. Past performance is no guarantee of future results.

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Please be aware that liquidity instruments may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall. In a declining interest-rate environment, the portfolio may generate less income.

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