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August 31, 2021

Central Banks Await More Substantial Economic Progress

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August 31, 2021

Central Banks Await More Substantial Economic Progress


Market Insights

Central Banks Await More Substantial Economic Progress

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August 31, 2021

 
 

Federal Reserve Board1

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 July meeting, as expected. While messaging remained generally consistent with the prior month’s meeting, the Federal Reserve (Fed) upgraded its stance on the economy, noting that it has “continued to strengthen.” In consideration of preparing for balance sheet tapering, Chairman Powell indicated that the economy has made progress toward the Fed’s employment and inflation goals but data have not been “sufficient” to warrant policy shifts. Current policy continues to be viewed as “appropriate,” and the committee will “continue to assess progress in coming meetings.”              

European Central Bank1

At the European Central Bank’s (ECB) policy meeting on July 22, President Lagarde and the policy committee left the ECB deposit rate unchanged at -0.50%, as expected. The committee kept the size of the pandemic emergency purchase program (PEPP) and asset purchase program unchanged in July. While monetary policy was held steady, President Lagarde and the Governing Council tweaked their stance on forward guidance. In what’s being viewed as a more accommodative approach, the ECB plans to keep rates at current or lower levels until “inflation is sufficiently advanced to be consistent with inflation stabilizing at 2% over the medium term.

Bank of England1

Although no formal policy meeting was held in July, analysts expect the Bank of England to leave monetary policy and the quantitative easing program unchanged in August. While expectations for policy shifts have been subdued, analysts anticipate the Monetary Policy Committee to portray an optimistic attitude regarding the economy.  

 
 
 
DISPLAY 1: Overnight Rates
 

Source: Bloomberg

 
 
 
DISPLAY 2: LIBOR Rates
 

Source: Bloomberg

 
 
 
DISPLAY 3: Yield Curves
 

Source: Bloomberg.

 
 

PORTFOLIO STRATEGY

MSLF EURO LIQUIDITY FUND (LVNAV)

Half year-end was negotiated comfortably, with the Fund size remaining stable around the €9.0 billion mark and only repos dropping significantly in yield (about 25 basis points lower than normal overnight levels). The flattening/inversion of the euro yield curve continued in July, particularly now that 6-month trades are maturing in January and are therefore more expensive or are simply not being shown by banks. The European Central Bank’s dovish new forward guidance, as well as the scale of excess liquidity in the system, has done little to abate this. As such, weekly liquidity (which was already elevated due to half-year-end positioning) remained in the mid 40% range for much of the month, as attractive opportunities to extend the Fund have been scarce. Tail-end bonds continue to be difficult to source, although we are still taking the opportunity to replace maturities in this space when we can.

MSLF STERLING LIQUIDITY FUND (LVNAV)

The sterling curve continues to show value, particularly in longer maturities. However, yields for shorter maturities (especially shorter than the 7-month tenor) have fallen recently, with many issuers in 3-month tenors showing levels that are lower than alternatives in overnight. The Fund continued to gain assets during the month, increasing from £7.2 billion to finish July at around £7.6 billion. The inflows have allowed us to add some attractive longer assets in the 9-month and 1-year space, while still adding in 3- and 4-month where there is yield pick-up over overnight. We have also added a further 1-year SONIA floating-rate note and we remain vigilant for more opportunities in this space, as we look to extend the WAL (weighted average life). With the recent longer trades, the WAM (weighted average maturity) ticked up to the low 50 days by the end of the month, so there is also some scope to extend this further. Weekly liquidity has remained elevated and ended July at circa 50%.

MSLF U.S. DOLLAR LIQUIDITY FUND (LVNAV)

Throughout the month, broader market volatility caused by concerns over the spreading delta variant did not flow through to the money market space, with 3-month LIBOR4 rallying to set at an all-time low of 0.11775% on month-end. With a flat curve not compensating investors to extend maturities and take on additional credit and interest rate risk, we remain patient in our investment approach, waiting for dislocations in pricing before putting capital to work. Portfolio WAM and WAL organically rolled down throughout the month, with weekly liquidity remaining elevated in excess of 50%.

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

In July, yields remained compressed and the curve flat with most Treasury bill auctions stopping between 0.04% and 0.05%. Extreme amounts of cash in the front end kept short rates well anchored with overnight repo rates steady at 0.05% all month. In the first half of July, we continued buying 6-month bills then largely ceased purchasing these bills in the latter half of the month, as we felt comfortable with current extensions and the portfolio’s duration profile. At month-end, the debt ceiling suspension ended, and in August, the government began using extraordinary measures to remain below the debt limit. We remain vigilant of potential Treasury exposures near the debt ceiling “drop-dead date”. Although the date is a moving target, we currently expect it to be in October. Markets are not pricing any debt limit disturbances yet and we hope Congress will address the limit in short order. In the meanwhile, we sold off several Treasury positions and reinvested into overnight repos or other Treasuries given the lack of much yield effect to do so. We continued to invest a significant amount of cash in overnight repurchase agreements and to 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.
 
 
 
 

Institutional Distributing and Institutional Accumulation Share Class Risk and Reward Profile

 

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 July 2021 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 US 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. Spain: MSIM Fund Management (Ireland) Limited, Sucursal en España 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, Sucursal en España with seat in Calle Serrano 55, 28006, Madrid, Spain, is registered in Spain with tax identification number W0058820B.  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

EU Cross Border Distribution of Funds Important Disclosure

This is a marketing communication. Applications for shares in the Fund should not be made without first consulting the current Prospectus and the Key Investor Information Document (“KIID”), which are available in English and in the official language of your local jurisdiction at https:// www.morganstanley.com/pub/content/imweb/im/en-gb/liquidity-investor/ or free of charge from the Registered Office of Morgan Stanley Liquidity Funds, European Bank and Business Centre, 6B route de Trèves, L-2633 Senningerberg, R.C.S. Luxemburg B 29 192. A summary of investor rights is available in English at the same website.

If the management company of the relevant Fund decides to terminate its arrangement for marketing that Fund in any EEA country where it is registered for sale, it will do so in accordance with the relevant UCITS rules.

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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