Insight Article Desktop Banner
Market Insights
August 16, 2021

Central Banks Await More Substantial Economic Progress

Insight Video Mobile Banner
August 16, 2021

Central Banks Await More Substantial Economic Progress

Market Insights

Central Banks Await More Substantial Economic Progress

Share Icon

August 16, 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: Monthly Interest Rate Summary as of 7/31/21.

Source: Bloomberg.

Display 2: MSILF Weighted Average Maturities (WAM)2 Summary as of 7/31/21.

Source: iMoneyNet 




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 (weighted average maturity) and WAL (weighted average life) organically rolled down throughout the month, with weekly liquidity remaining elevated in excess of 50%.


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 the volume rising in the reverse repurchase (RRP) facility, hitting a new high at $1.039 trillion on July 30. 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 portfolio duration profiles. 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 portfolios to be responsive to changes in market conditions and interest rate levels.


At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) declined during the month of July. The SIFMA Index,6 which measures yields for weekly VRDOs, dropped 0.01% to 0.02%. Yields at the longer end of the municipal money market maturity range dropped as supply remained constrained. The Bloomberg BVAL One-Year Note Index7 finished the month at 0.06%, down 0.08% from the prior month-end. The short-term tax-exempt market is expecting to see continuing strong demand throughout the next month with the support of redemptions and forthcoming August cash.


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 The London Interbank Offered Rate (LIBOR) is the short-term interest rate that banks charge one another and that is generally representative of the most competitive and current cash rates available.

5 Government and Treasury Funds are Stable NAV funds.

6 The SIFMA Municipal Swap index is a 7-day high-grade market index comprised of tax-exempt VRDOs reset rates that are reported to the Municipal Securities Rule Making Board’s (MSRB’s) SHORT reporting system.

7 The Bloomberg BVAL One-Year Note Index represents tax-exempt municipal bonds that have an average rating of AAA by Moody’s and S&P.

The views and opinions expressed are those of the Portfolio Management team as of July 31, 2021 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.

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

Past performance is no guarantee of future results. This document represents the views of the portfolio management team. The authors’ views are subject to change without notice to the recipients of this document. It does not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management and may not be reflected in other strategies and products that the Firm offers.

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.

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    •    Terms of Use

©  Morgan Stanley. All rights reserved.

Morgan Stanley Distribution, Inc. Member FINRA/SIPC.