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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.

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.



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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.

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