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January 27, 2021

Rising COVID-19 Cases Prompt Central Banks to Extend Aid

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January 27, 2021

Rising COVID-19 Cases Prompt Central Banks to Extend Aid


Market Insights

Rising COVID-19 Cases Prompt Central Banks to Extend Aid

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January 27, 2021

 
 

Federal Reserve Board1

As expected, the Federal Open Market Committee (FOMC) kept the range for the federal funds rate unchanged at 0.00% to 0.25% at the conclusion of its December meeting. Much of the meeting’s focus related to forward guidance and the asset purchase program. The Federal Reserve (Fed) reiterated it will “continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” Effectively signifying that until both maximum unemployment and consistent 2% inflation is met, the Fed will continue asset purchases.

 
 
 
Display 1: Overnight Rates
 

Source: Bloomberg

 
 

In addition to the press release, the Fed updated its economic projections. Chairman Powell and the FOMC reinforced their forward guidance and accommodative policy stance with the updated dot plot, which illustrates that 16 out of 17 officials expect to keep rates at current levels through 2022, while 12 of the 17 officials expect rates to remain unchanged through 2023. The FOMC projects real gross domestic product (GDP) to contract by 2.4% in 2020, but rebound in both 2021 and 2022. The Fed estimates the unemployment rate will decrease to 6.7% in 2020, then recover sharply in the following two years. The committee marginally increased projections for core Personal Consumption Expenditures, but does not see inflation rising to 2% until 2023. While many of these figures were positively revised since September, the FOMC plans to use “its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.”

 
 
 
Display 2: LIBOR Rates
 

Source: Bloomberg

 
 
 
Display 3: Yield Curves
 

Source: Bloomberg

 
 

European Central Bank1

At the European Central Bank’s (ECB) policy meeting on December 10, President Lagarde and the policy committee kept the ECB deposit rate unchanged at -0.50%, as expected. The Committee increased the total size of the Pandemic Emergency Purchase Program (PEPP) by €500 billion, bringing the total size of the program to €1.85 trillion, and extended the facility through March 2022, while it left the Asset Purchase Program (APP) unchanged. Market participants had expected the ECB to act, as this modification was telegraphed in prior meetings to offset the negative impacts of a second lockdown and weakening economic data. Additionally, targeted longer-term refinancing operations (TLTRO III) were extended until June 2022 and four pandemic emergency longer-term refinancing operations (PELTROs) will be offered in 2021.

Bank of England1

The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.10% and its U.K. government bond purchase program at its December meeting. The MPC noted that the second set of lockdowns and increasing COVID-19 case count would negatively weigh on economic data. The committee believes fourth quarter GDP will be slightly weaker than anticipated, but is developing a more optimistic view with the vaccine rollout in the first half 2021. The committee believes vaccine rollout procedures will “reduce the downside risks to the economic outlook.” Going forward, the MPC will continue to monitor economic and inflation data while standing ready to take “whatever additional action is necessary to achieve its remit.”

Portfolio Strategy

MSLF EURO LIQUIDITY FUND (LVNAV)

With high excess liquidity, reduced balance sheet capacity and December’s ECB meeting adding further monetary stimulus, monetary conditions were very loose going into year end. Consequently, we shifted investments away from overnight deposits and reverse repurchase agreements and into bills and agency paper. This strategy led to an extension of the WAM and WAL at the start of December, whilst maintaining sufficient weekly liquidity (which fluctuated between the mid- 40% and mid-50% range during the month). The Fund’s assets under management continued to grow throughout December and ended the year at circa €10.6 billion, €2.5 billion higher than at the start of the month. These inflows further added to the challenge of finding year-end capacity and impacted the yield as year-end investments moved increasingly expensive.

MSLF STERLING LIQUIDITY FUND (LVNAV)

Year-end issues also dominated sterling markets in December, with few positive-yielding issuers in maturities under 6 months. We mainly relied on secondary issuance to invest at positive yields, although some negative-yielding investments were necessary to invest inflows ahead of year end. With repo rates showing volatility and year end approaching, we were able to reduce overnight liquidity from the mid-40% range, whist maintaining weekly liquidity around the 40% mark. The WAM and WAL increased during the month as we saw significant outflows as we approached year end, finishing the year at 60 and 69 days, respectively (up from 50 and 58 days at the start of the month).

MSLF U.S. DOLLAR LIQUIDITY FUND (LVNAV)

The Fed kept interest rates near zero and made no changes to its asset purchases at the December FOMC meeting. Officials indicated that while “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year,” they will continue to support the economy through monetary stimulus until they see substantial progress in employment and inflation. As we approached year-end, technicals on the short end of the curve put slight pressure on the wholesale funding market, driving 3-month LIBOR to its highest level since August, setting at 0.25388% on December 29. In the portfolios, we continue to opportunistically purchase fixed-rate securities across the curve, locking in attractive yields and avoiding reset risk associated with floating-rate securities, as there will likely be downward pressure on LIBOR and SOFR in early 2021. Throughout December and looking ahead, we remain conservatively positioned across our funds, prioritizing elevated levels of weekly liquidity to meet any unexpected volatility.

MSLF U.S. DOLLAR TREASURY LIQUIDITY FUND (PUBLIC DEBT CNAV)

In December, U.S. Treasury bill yields remained low and in the single digits across most of the one-year curve. Toward the end of the month, Congress finally passed a $900 billion stimulus package after much debate. Treasury bill yields moved a hint higher then were quickly pushed lower as investor demand for bills increased with year-end approaching. Overnight repo rates remained well behaved as expected over year-end. At the December FOMC meeting, the Committee reiterated that policy will remain accommodative, as it is now, for a long time. Projections for the economy were upgraded somewhat and the monthly Treasury and mortgage securities purchases will continue “at least” at the current pace until substantial further progress is made toward its dual mandate goals. We continued to buy Treasury bills with up to 6-month tenors while keeping a fair amount in overnight repos collateralized by U.S. Treasuries. We continue to ensure high levels of liquidity and manage the portfolio 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 www.morganstanley.com/im to see the latest performance returns for the fund’s other share classes.

 
 

1 Source: Bloomberg.

 

 
 
 
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 31 December 2020 and subject to change daily.

INDEX INFORMATION

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.

DEFINITIONS

Weighted average maturity (WAM) – measures the weighted average of the maturities of the portfolio’s individual holdings, taking into account reset dates for floating rate securities. Weighted average life (WAL) – measures the weighted average of the maturities of the portfolio’s individual holdings. 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.

DISTRIBUTION

This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations. In particular, the Shares are not for distribution to U.S. persons.

Ireland: MSIM Fund Management (Ireland) Limited. Registered Office: The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. Registered in Ireland as a private company limited by shares under company number 616661. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA, authorised and regulated by the Financial Conduct Authority. Dubai: Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany: MSIM Fund Management (Ireland) Limited Niederlassung Deutschland, Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy: MSIM Fund Management (Ireland)Limited, Milan Branch (Sede Secondaria di Milano) is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 11488280964. The Netherlands: MSIM Fund Management (Ireland) Limited, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. France: MSIM Fund Management (Ireland) Limited, Paris Branch is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Paris Branch with seat at 61 rue de Monceau 75008 Paris, France, is registered in France with company number 890 071 863 RCS. Switzerland: Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0) 44 588 1074.

IMPORTANT INFORMATION

EMEA: This marketing communication has been issued by MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. MSIM Fund Management (Ireland) Limited is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland.

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.

The material contained herein has not been based on a consideration of any individual client circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the applicable European or Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

MSIM has not authorised financial intermediaries to use and to distribute this document, unless such use and distribution is made in accordance with applicable law and regulation. MSIM Ireland shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary. If you are a distributor of the Morgan Stanley Liquidity Funds, some or all of the funds or shares in individual funds may be available for distribution. Please refer to your sub-distribution agreement for these details before forwarding fund information to your clients.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without MSIM’s express written consent.

All information contained herein is proprietary and is protected under copyright law.

This document may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this document in another language, the English version shall prevail.

 

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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