December 31, 2020
Central Banks Prepare to Confront COVID-19 Second Wave
December 31, 2020
Federal Reserve Board1
As expected, the Federal Open Market Committee (FOMC) kept the target range for the federal funds rate unchanged at 0.00% to 0.25% at the conclusion of its November 5 meeting. In addition, the FOMC maintained its quantitative easing program, saying, “over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace.” The consistent messaging from the Federal Reserve (Fed) allowed it to maintain a low profile while much of the country focused on the U.S. presidential election.
European Central Bank1
The European Central Bank (ECB) did not meet in November. During its October meeting, the ECB implied the potential for additional stimulus in response to the renewed national lockdowns and economic risks to the region. Macro data since then have done little to change the markets’ prevailing view that more stimulus is forthcoming. With COVID-19 cases still rising globally, investors will be paying close attention to the ECB’s December meeting for any policy shifts or announcements.
Bank of England1
The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.10% at its November 5 meeting. The MPC also voted unanimously to increase its target purchase of U.K. government bonds by an additional £150 billion, bringing the total to £875 billion. Central bank officials downgraded the economic forecast as England entered a four-week lockdown in November and Brexit uncertainty loomed ahead of the December 31 transition period end. The MPC believes it still has more ammunition and will continue to monitor economic and inflation data while standing ready to take “whatever additional action is necessary to achieve its remit.”
MSLF EURO LIQUIDITY FUND (LVNAV)
ECB officials continued to assert their plans to enact additional stimulus at the upcoming December meeting, as the eurozone’s economic recovery was faltering under the strain of renewed restrictions and lockdowns across central Europe. With excess liquidity already at record highs, short-term rates would likely remain under pressure. The yield curve is already very flat and little pick-up in yield is available for longer-dated investments. Indeed, the year-end pressures are already starting to be reflected in maturities over the turn of the year with much lower yields. The Fund’s assets under management continued to grow in November, breaking through €8 billion at month end.
MSLF STERLING LIQUIDITY FUND (LVNAV)
MPC members continue to debate the potential use of negative interest rates as Brexit uncertainty continues to impact sentiment, along with usual year-end constraints. Consequently, the money market yield curve remains entirely flat or inverted for the sterling market. Given the continued low yields, we have limited trading to seeking the best yields available in different tenors to try and maintain a competitive yield, while maintaining overnight and weekly liquid assets well above our regulatory requirements. This has lengthened the WAM of the Fund to the low 50s range, with the WAL just over 60 days intra-month. The Fund size has shown continued growth, reaching over £5.1 billion intra-month before month-end flows dropped the Fund size to around £4.5 billion by end of November.
MSLF U.S. DOLLAR LIQUIDITY FUND (LVNAV)
Fed officials kept interest rates near zero and made no changes to their asset purchases at the November FOMC. While reiterating their message from prior meetings, officials indicated that the ongoing “public health crisis will continue to weigh on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” As positive economic data continues to hit headlines, and the short end of the curve remains flush with cash, three-month LIBOR continues to break all-time lows, setting at 0.20488% on November 20. With spreads remaining tight and potential market volatility likely in the near term, we remain conservatively positioned across our funds, maintaining elevated levels of liquidity and keeping the weighted average life (WAL) below 50 days.
MSLF U.S. DOLLAR TREASURY LIQUIDITY FUND (PUBLIC DEBT CNAV)
It was a news-filled month between the U.S. elections and COVID-19 vaccines. The news did not include another stimulus package, but the debate continued as it has for several months. The November FOMC meeting had no actions announced but highlighted the impact of the virus weighing on economic activity and on the FOMC’s outlook. At mid-month, overnight repurchase agreement rates moved lower on market technicals and recovered as expected to its normal range by month-end. We continued to buy Treasury bills up to 6-month tenors as the bill curve remains very flat. We continue to ensure high levels of liquidity and manage the portfolio to be responsive to changes in market conditions and interest rate levels.
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.