May 28, 2021
Economic Data Improves, but Central Banks Still See Risks
May 28, 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 April meeting. While the Federal Reserve (Fed) maintained its steadfast accommodative monetary policy, it noted changes to the economy, progress on vaccinations, and risks to the outlook. For the first time, the Fed commented on the vaccine rollout and strong fiscal policy that have helped “strengthen” the economy. More specifically, the Fed said, “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.” The Fed removed “considerable” when describing risks to the economy, saying, “the ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.” Looking ahead, Chairman Jerome Powell strongly reiterated the Federal Reserve’s forward guidance on quantitative easing policy and view on rates, as they still consider the economy a long way from the Fed’s goals.
European Central Bank1
At the European Central Bank’s (ECB) policy meeting on April 22, 2021, President Lagarde and the policy committee left the ECB deposit rate unchanged at -0.50%, as expected. The committee kept the size of its pandemic emergency purchase program (PEPP) and asset purchase program unchanged in April. Similar to its March statement, the Governing Council plans to conduct purchases under its PEPP at a “significantly higher pace than during the first months of the year.” While the environment remains uncertain, the ECB views current policy as appropriate and will remain accommodative until inflation moves towards its mandate.
Bank of England1
Although no formal policy meeting was held in April, analysts expect the Bank of England (BOE) to leave policy unchanged in May. While national lockdowns will have an impact on economic data, analysts believe it will be less adverse than originally expected. Investors will want to pay attention to the BOE’s guidance on economic activity and how the vaccine rollout are affecting the economy.
MSLF EURO LIQUIDITY FUND (LVNAV)
Yield curves in euros continue to challenge following the settlement of the latest TLTRO III (targeted longer-term refinancing operations) allocation and the dampening effect that it has had on wholesale funding needs. We are again facing a market where the premium to invest beyond overnight is limited until around 6 months in duration. Following outflows around quarter-end, early April inflows took the Fund back to over €9 billion in asset size before redemptions in the second half of the month reduced the Fund to circa €8 billion in assets. The Fund has favoured building liquidity in the short end, with limited investment in longer-dated assets. Where opportunities are arising, they are typically in tail-end bonds, in either covered or senior format, and we have taken the opportunity to replace a number of maturities in this space. The Fund’s weighted average maturity (WAM) and weighted average life (WAL) remained in the low to mid 50 days for much of the month, and we continued to maintain good levels of liquidity.
MSLF STERLING LIQUIDITY FUND (LVNAV)
The sterling curve continued to improve in April, offering opportunities to invest in higher yields. This was particularly true of U.S. dollar swapping names, leading the Fund to increase its exposure to higher quality Australian, Canadian and Scandinavian issuers, which are typically AA rated and were offering better yields than other European issuers. The Fund continued to gain assets throughout April, increasing from circa £4.6 billion to close the month at around £5.5 billion, having reached an all-time high on 28 April. Much of the inflows were invested in 3- to 6-month assets to take advantage of the improved curve, leading the WAM and WAL to increase throughout the month. As the inflows began to slow in the second half of the month, the weekly liquidity returned to near our target of just over 40%.
MSLF U.S. DOLLAR LIQUIDITY FUND (LVNAV)
With cash remaining abundant on the short end of the curve, spreads stayed tight and LIBOR once again hit new all-time lows intra-month of 0.17288% on April 21. We maintained our strategy of adding fixed-rate investments to the portfolio, due to the liquidity and roll-down benefits of that structure. Weekly liquidity in our portfolios remain elevated, in excess of 50% throughout the month.
MSLF U.S. DOLLAR TREASURY LIQUIDITY FUND (PUBLIC DEBT CNAV)
Yields on overnight repurchase agreements remained extremely low with SOFR printing at 1 basis point each day in April. Short maturity Treasury yields remained in the single digits across the curve, with 1-month through 1-year bill auctions stopping between zero and 0.065%. Cash inflows into money market funds continued in April, as did net Treasury bill pay-downs, both of which weighed on front-end yields. Not surprisingly, volume in the reverse repurchase (RRP) facility steadily increased to a peak of roughly $183 billion at month-end. We selectively bought Treasuries across the curve and invested a large portion of the portfolio in short-term repurchase agreements. 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.
Institutional Distributing and Institutional Accumulation Share Class Risk and Reward Profile