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September 17, 2020

Central Banks Continue to Hold, but Ready to Act

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September 17, 2020

Central Banks Continue to Hold, but Ready to Act

Market Insights

Central Banks Continue to Hold, but Ready to Act

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September 17, 2020


Federal Reserve Board1

The Federal Open Market Committee (FOMC) did not formally meet in August, but Chairman Powell did speak at the annual Jackson Hole symposium. As expected, he reaffirmed the belief that rates would be lower for longer and monetary policy would not stifle any potential recovery. Going forward, the Fed plans to let inflation run higher utilizing an “average inflation targeting” approach. This significant change in policy means inflation will be allowed to run “moderately” higher “for some time” before eliciting any potential rate hike. In addition to the aforementioned policy shift, Chairman Powell plans to modify the Federal Reserve’s employment mandate to become more “inclusive” which suggests a greater focus on targeting lower income earners. The FOMC meets on September 16, 2020, which many anticipate will clarify the policy changes referenced at Jackson Hole.

 European Central Bank1

While no formal policy meeting was held in August, market participants and analysts expect the European Central Bank (ECB) to keep rates and stimulus unchanged. The ECB’s next meeting on September 10, 2020 is highly anticipated, considering the unprecedented policy actions taken by central banks around the world.

Display 1: Monthly Interest Rate Summary

Source: Bloomberg

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

Source: iMoneyNet


Bank of England1

The Bank of England (BoE) Monetary Policy Committee (MPC) met in August and voted unanimously to maintain the Bank Rate at 0.10%. In addition, the MPC voted unanimously to maintain its U.K. government bond purchase programs. The MPC illustrated a more optimistic view on the economy as its witnessed improvements in spending, household consumption and the housing market. It also noted global consumption had improved from the lows brought upon by COVID-19. While the BoE kept rates and stimulus unchanged, the Committee “will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit.”

Portfolio Strategy


Minutes from the July FOMC meeting and comments from Chairman Powell at the annual Jackson Hole symposium cemented the notion that rates will remain on hold for the next few years. With a flat yield curve and spreads remaining tight on the short end of the curve, we predominantly purchased securities that mature inside of year-end, allowing the weighted average life of our portfolios to gradually roll down to approximately 60 days as of the close of the month. Three-month LIBOR held relatively static month-over-month, but was still setting well above where most banks are transacting in the wholesale commercial paper/certificates of deposit market. We remain comfortable managing the portfolios with elevated levels of liquid assets, helping ensure that we uphold our mandates of capital preservation and liquidity.


The stalemate in Congress over the details of a new stimulus package continued throughout the month of August. As no agreement materialized, net Treasury bill pay-downs continued during the month, putting some downward pressure on short yields. Overall, the Treasury bill curve remained flat, with longer yields largely unchanged. We anticipate more Treasury bill supply, but the timing is dependent on the passage of another package. Overnight repurchase agreement rates softened somewhat during the month as we continued to invest in fixed-rate Treasuries largely up to six-month maturities. While fixed-rate agencies remain rich relative to Treasury bills, we bought shorter-dated agency floating-rate notes. 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.


At the short end of the curve, yields for variable rate demand obligations (VRDOs) dropped during the month of August. The SIFMA Index,5 which measures yields for weekly VRDOs, fell 0.07% over the course of the month to 0.09%. Yields at the longer end of the municipal money market maturity range were little changed during the month. The The Bond Buyer One-Year Note Index6 finished the month at 0.20%, up 0.01% from the prior month. Municipal issuers have been taking advantage of historically low long-term interest rates, choosing to finance more of their capital needs with longer fixed-rate structures rather than variable-rate paper.



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 Government and Treasury Funds are Stable NAV funds.

5 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.

6 The Bond Buyer Index, or the Bond Buyer’s Municipal Bond Index, is an index published by The Bond Buyer, a daily finance newspaper that covers the municipal bond market. The Bond Buyer Index, also known as the BB40 index, is based on the prices of 40 recently issued and actively traded long-term municipal bonds.

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 views and opinions expressed are those of the Portfolio Management team as of September 1, 2020 and are subject to change based on market, economic and other conditions. Past performance is not indicative of future results.

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.


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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