March 16, 2021
Central Banks Hold the Line on Accommodation
March 16, 2021
Federal Reserve Board1
While no formal policy meeting occurred in February, Chairman Jerome Powell presented the Federal Reserve’s (Fed) semiannual monetary policy report to Congress. The chairman kept his prepared remarks very consistent with recent Fed language and Federal Open Market Committee (FOMC) press releases. He reiterated that the Fed is committed to maximum employment and price stability in addition to its current monetary policy stance. The next FOMC meeting will be held on March 16-17 and will feature an updated summary of economic projections.
European Central Bank1
The European Central Bank (ECB) also did not hold a formal policy meeting in February. In the upcoming March meeting, analysts expect the ECB to leave policy unchanged. Outside of policy, the ECB’s commentary on the ongoing impact of national lockdowns on economic data will be highly sought. Additionally, investors are paying close attention to any insight the ECB can offer on the European Union’s vaccine rollout and the path of the Eurozone’s economic recovery.
Bank of England1
The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.10% and leave its U.K. government bond purchase program unchanged at its February meeting. The press release noted that fourth quarter gross domestic product (GDP) growth softened as the U.K. reintroduced lockdowns to contain the spread of COVID-19 but markets have remained “resilient.” The committee expects inflation to increase in the spring, although the labor market remains “difficult to interpret.” Consistent with its prior meeting, the MPC projects GDP to increase “rapidly” as the vaccine rollout continues and restrictions are lifted. Looking ahead, the MPC believes current policy is appropriate; however, if the inflation outlook deteriorates the committee “stands ready to take whatever additional action is necessary to achieve its remit.”
On the short end of the curve, an abundance of cash and an increase in reserves pushed three-month LIBOR to all-time lows, setting at 0.17525% on February 19, while clearing levels in the wholesale funding market continue to go through 3 to 5 basis points tighter. With spreads remaining tight and LIBOR4 and SOFR5 continuing to grind lower, we maintained our strategy of adding fixed rate investments to the portfolio, seeking to avoid reset risk associated with floating rate notes. Weekly liquidity in our portfolios remains elevated, in excess of 50% throughout the month.
During February, yields continued to be under pressure across the curve with one-year Treasury bill yields hitting a new low of 0.07% and SOFR also marking a new low of 0.01%. This contrasts with the long end of the curve where yields pushed much higher during the month. The U.S. Treasury cut bill supply after its quarterly refunding meeting, eliminating two cash management bills from its auction schedule. We expect the continued decline of the Treasury’s cash balances and bill cuts will only pressure short rates further. While a new stimulus package is working its way through Congress, it is uncertain if bill supply will increase in the near term. We continued to buy U.S. Treasury bills and coupons and add in short-term repurchase agreements across the portfolios. 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.
Treasury yields experienced significant volatility during the latter part of February, while equities pulled back from all-time highs, as optimism surrounding a swift U.S. economic recovery built on the heels of an impending $1.9 trillion stimulus package and a continued drop in COVID-19 cases prompted questions about the Fed’s accommodative monetary policy. At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) were little changed during the month. The SIFMA Index,7 which measures yields for weekly VRDOs, dropped 0.01% from the end of January to finish the month at 0.03%. Yields at the longer end of the municipal money market maturity range trended higher, following Treasuries, while supply remained constrained. The Bloomberg BVAL One-Year Note Index8 finished the month at 0.14%, up 0.04% from the prior month-end. With the positive tailwinds of a lighter settlement calendar and the arrival of March 1 cash, we expect VRDO rates to remain near these near-zero yields into early March, before gradually climbing over the course of the month when quarter-end and tax time outflows drive rates higher.
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 www.morganstanley.com/liquidity or call 1.800.236.0992. Please read the prospectus carefully before investing.