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October 31, 2020

Central Banks Cautious Amid Rising COVID-19 Cases

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October 31, 2020

Central Banks Cautious Amid Rising COVID-19 Cases


Market Insights

Central Banks Cautious Amid Rising COVID-19 Cases

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October 31, 2020

 
 

Federal Reserve Board1

As expected, the Federal Open Market Committee (FOMC) kept the target range for the federal funds rate unchanged at 0.00% to 0.25% at the conclusion of its November 5th meeting. The press release was relatively in line with prior months. To learn more, please listen to our November FOMC Meeting Recap here.

European Central Bank1

At the European Central Bank’s (ECB) policy meeting on October 29th, President Lagarde and the policy committee kept the ECB deposit rate unchanged at -0.50%, as expected. While the committee kept the total size of the Pandemic Emergency Purchase Program at €1.35 trillion and left the Asset Purchase Program unchanged, it implied further stimulus measures were likely. In response to national lockdowns and economic risks, the release noted, “the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation and to ensure that financing conditions remain favorable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path.” While no changes were made to monetary policy in October, investors will be paying close attention for any new policy announcements during the next ECB meeting on December 10th.

 
 
 
Display 1: Monthly Interest Rate Summary
 

Source: Bloomberg

 
 

Bank of England1

The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.10% at its November 5th meeting. The MPC also voted unanimously at its meeting to increase its target purchase of U.K. government bonds by an additional £150 billion, bringing the total to £875 billion. Economic forecasts have been cut as England entered into a full four-week lockdown in an attempt to reduce the spread of COVID-19. With Brexit uncertainty still on the horizon, the MPC believes it still has more it can do, but for now asset purchases remain the preferred monetary policy tool. 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.”

 
 
 
Display 2: Morgan Stanley Institutional Liquidity Funds (MSILF) Weighted Average Maturities (WAM) Summary2
 

Source: iMoneyNet

 
 

Portfolio Strategy

Prime Strategy3

Minutes from the September FOMC provided more color around the committee’s pivot to an average inflation target but added little clarity to their outlook for asset purchases. Third quarter gross domestic product expanded at a record 33.1%4, fueled by personal spending growth, after declining in the prior quarter by the most in seven decades of data. As positive economic data continues to hit headlines, and the short end of the curve remains flush with cash, 3-month LIBOR touched all-time lows on October 19, setting at 0.20863%. With spreads remaining tight and potential market volatility in the near term, we remain conservatively positioned across our funds, maintaining elevated levels of liquidity and keeping the weighted average life (WAL) below 55 days.  

Government/Treasury Strategy5

We continued to have Treasury bill pay-downs during October, which moved yields marginally lower. The debate over another stimulus bill continued all month in Washington and did not result in a plan, pushing the possibility for more bill supply to some time after the presidential election. Across the funds, we continued to favor purchasing Treasury bills up to 6-month tenors and added some longer-term, fixed-rate agency coupons. We also added some short-term repurchase agreements, but overall the yield curve remains very flat. We continue to seek to ensure high levels of liquidity and manage the portfolios to be responsive to changes in market conditions and interest rate levels.

Tax-Exempt Strategy3

Municipal issuers took advantage of the low-rate, high-demand environment in October to come to market ahead of election week and the uncertainty and volatility that will be coming afterward. The month saw over $65 billion6 of volume come into the market. The SIFMA Index7, which measures yields for weekly variable rate demand obligations (VRDOs), was little changed over the course of the month, rising just 0.01% to 0.12%. Yields at the longer end of the municipal money market maturity range were also little changed during the month, as investors digested a significant pickup in the pace of new debt sales in October. A lack of clarity around fiscal aid exacerbated broader market volatility during the month. In the period ahead, we will watch to see how monetary policy unfolds and determine what impact the election results may have on municipal yields. We maintain a short duration stance given stretched valuations and the potential for increased volatility in the coming months.

 
 

 

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 Source: Bloomberg

5 Government and Treasury Funds are Stable NAV funds.

6 Source: Bond Buyer

7 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.

The views and opinions expressed are those of the Portfolio Management team as of October 31, 2020 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.

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