October 31, 2020
Central Banks Cautious Amid Rising COVID-19 Cases
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.
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.”
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.
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.
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.