Insight Article Desktop Banner
Market Insights
February 15, 2023

Are We There Yet?

Insight Video Mobile Banner
February 15, 2023

Are We There Yet?

Market Insights

Are We There Yet?

Share Icon

February 15, 2023


Federal Reserve Board1
The Federal Open Market Committee (FOMC) voted unanimously to increase the federal funds target rate by 0.25% to a range of 4.50% to 4.75% at the conclusion of its February meeting. The committee noted that further rate hikes are “appropriate” in order to achieve “sufficiently restrictive” policy. The FOMC modified their messaging: the post-meeting statement. It had previously discussed the “pace” of future rate increases, but now refers to the “extent” of future increases. This change doesn’t seem overly impactful on the surface, but it points to a Fed that is beginning to approach the end of its rate hiking cycle. Fed officials continue to monitor the economic outlook in effort to position policy accordingly. Market participants expect the Fed to continue raising rates into early summer, as January’s employment figures far exceeded expectations.

European Central Bank1
At the European Central Bank’s (ECB) policy meeting on February 2, President Lagarde and the policy committee increased the ECB deposit rate by 0.50% to 2.50%. The ECB illustrated that it intends to continue raising rates in March by 0.50%. Subsequently, the committee will reevaluate the path of monetary policy. The central bank stressed the importance of keeping rates at “restrictive levels” for longer to avoid another flare-up of inflation and shifting projections in the wrong direction.

Bank of England1
The Bank of England (BoE) Monetary Policy Committee (MPC) voted 7-2 to increase the Bank Rate by 0.50% to 4.00% at its February meeting. The two dissenting members preferred to keep the rate unchanged at 3.50%. While December inflation posted at 10.5%, the BoE expects inflation to fall towards 4% by year end. The committee noted inflation is beginning to turn, but the labor market remains tight and price and wage pressures are still present. Risks remain elevated as economic indicators point to a higher risk of entrenched inflation.

Display 1: Monthly Interest Rate Summary as of 1/31/23.

Source: Bloomberg

Display 2: MSILF Weighted Average Maturities (WAM) Summary as of 1/31/23.2

Source: iMoneyNet 



Government/Treasury Strategy
Debt ceiling considerations have started to percolate through our market, and will continue to do so as the year progresses. Currently, it is still early in the process with new information coming out each week. While liquidity remained ample with plentiful supply, it is likely to be volatile amid the debt ceiling negotiations. Reverse repo (RRP) balances remain high and there is capacity to extend if needed.

Auctions in January have been taken down surprisingly well, despite the massive increase in issuance of short-dated bills early in the month. RRP has fallen from its peak levels as funds have gently moved into some of this cheaper collateral and the Fed stepped down to a 25 basis point hike on February 1. The 6-month auctions will be important to watch as we expect their maturity dates will start to fall in late summer/early fall, the likely period for debt ceiling fireworks. So far this year, we have not seen signs of stress in these auctions.

Additionally, Fed policy remains paramount to our market. Although the Fed downshifted to a 25 basis point hike at its most recent meeting, the path forward is unclear. The direction of inflation as depicted by incoming data will impact the Fed’s posture meeting by meeting.

The market is starting to show signs of a full shift from being enamored with inflation to being enamored with dis-inflation. Investors outside of money market funds have become more comfortable adding duration. However, we believe the Fed has more work to do to bring inflation to its target, and while we continue to add yield opportunistically within the scope of our duration view, we think prudence is still warranted.

The portfolios’ weighted average life (WAL) slightly increased as we looked to opportunistically add Treasury floating-rate note (FRN) exposure and incremental SOFR (secured overnight financing rate) FRN agency exposure. In the Treasury Securities portfolio, we lengthened weighted average maturity (WAM) heading into January, allowing us to avoid the year-end richening in short-maturity bills, and then rolled that paper back on the curve throughout January as supply increases cheapened 1- to 3-month paper. By the end of the month the Treasury Securities portfolio was back in line with our peers on WAM/WAL. In the Government funds, we added some small positions to our fixed-rate agency debt exposure late in the month.

Prime Strategy3
In January, spreads continued to rally after year-end and stabilized towards mid-month. Throughout the month, we allowed the portfolios to organically roll down with zero opportunity cost. Weighted average maturities (WAMs) increased slightly as periodic dislocations in pricing provided opportunities in the 6-month and longer tenors. Overall, market liquidity remained stable in the month, with ample supply and unconstrained dealer balance sheets.

Monetary policy remains the key driver of portfolio composition and positioning. We still think daily resetting floating-rate notes offer the most attractive opportunity because their coupons continue to reset higher as the Fed tightens monetary policy, while also remaining at an elevated level once the Fed reaches the terminal rate. Floating-rate notes can also offer a buffer from interest rate risk, as coupons will continue to reset if the Fed tightens by more than anticipated by the market.

Tax-Exempt Strategy
Short-term municipals saw a dramatic richening of valuations in January after experiencing a spike in rates in December. As we head into tax season, rates will likely rise as investors sell tax-exempt money funds to raise cash to meet tax payments.

Municipal credit quality continues to remain solid, and higher employment, increasing wages and rising property values have all served to bolster tax receipts. In general, municipal bonds as an asset class are also considered more defensive than most others during times of economic stress. State and local governments budget in advance, and it takes some time for economic downturns to start affecting their balance sheets – even more so for local municipalities that rely heavily on property taxes. Housing property tax receipts typically decline years after economic shocks, as it takes time for home values to be reassessed.

Uncertainty around the Federal Reserve, the Treasury market and the geopolitical landscape will likely continue to weigh on the market. Municipal yield movements are closely tracking the Treasury market’s high volatility, and it will likely require a calming of that volatility, as well as a more favorable technical municipal backdrop, to reignite persistent market conviction and sustained outperformance. As the Fed moves ahead with rate hikes based on potentially lagging economic data, the risk of a policy error grows.

We continue to place an emphasis on maintaining high levels of liquidity with diligent oversight of credit quality, portfolio maturity and diversification.4 In January we marginally extended the portfolio’s WAM as daily variable rate demand note (VRDN) rates dropped to a greater degree than weekly and tax-exempt commercial paper rates. Overall, we believe the portfolio is well positioned for a rising rate environment, with a short duration and high concentrations in variable rate demand obligations and floating-rate securities.


1 Source: Bloomberg.
2 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.
3 The Portfolio will be required to price and transact in their shares at a floating net asset value (“NAV”) and will be permitted to impose a liquidity fee on redemptions or temporarily restrict redemptions in the event that the Portfolio’s weekly liquid assets fall below certain thresholds.
4 Diversification does not eliminate the risk of loss.

The views and opinions expressed are those of the Portfolio Management team as of January 31, 2023 and are subject to change based on market, economic and other conditions. Past performance is not indicative of future results.

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.

One basis point = 0.01%

The Bloomberg U.S. Municipal Bond Index is an index that covers the USD-denominated long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. It is composed of approximately 1,100 bonds.

The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment.

The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass.  Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.

This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor 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.

Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. 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.

This material is not a product of Morgan Stanley’s Research Department and should not be regarded as a research material or a recommendation. Current and future portfolio holdings are subject to change. The forecasts in this piece are not necessarily those of Morgan Stanley, and may not actually come to pass.

Certain information herein is based on data obtained from third party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.

Please consider the investment objectives, risks, charges and expenses of the portfolios carefully before investing. The prospectus contains this and other information about the portfolios. To obtain a prospectus, download one at or call 1.800.236.0992. Please read the prospectus carefully before investing.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events.


You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds’ sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.


You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds’ sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

The Tax-Exempt Portfolio may invest a portion of its total assets in bonds that may subject certain investors to the federal Alternative Minimum Tax (AMT). Investors should consult their tax adviser for further information on tax implications.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.



This is a Marketing Communication.

Check the background of our firm and registered representatives on FINRA's BrokerCheck

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 the current rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. Longer-term securities may be more sensitive to interest rate changes. In a declining interest-rate environment, the portfolio may generate less income.

It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

Not FDIC Insured—Offer No Bank Guarantee—May Lose Value
Not Insured By Any Federal Government Agency—Not A Deposit

Subscriptions    •    Privacy & Cookies    •    Your Privacy Choices Your Privacy Choices Icon    •    Terms of Use

©  Morgan Stanley. All rights reserved.

Morgan Stanley Distribution, Inc. Member FINRA/SIPC.