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November 30, 2020

Central Banks Prepare to Confront COVID-19 Second Wave

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November 30, 2020

Central Banks Prepare to Confront COVID-19 Second Wave

Market Insights

Central Banks Prepare to Confront COVID-19 Second Wave

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November 30, 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 5 meeting. In addition, the FOMC maintained its quantitative easing program, saying, “over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace.” The consistent messaging from the Federal Reserve (Fed) allowed it to maintain a low profile while much of the country focused on the U.S. presidential election.

European Central Bank1

The European Central Bank (ECB) did not meet in November. During its October meeting, the ECB implied the potential for additional stimulus in response to the renewed national lockdowns and economic risks to the region. Macro data since then have done little to change the markets’ prevailing view that more stimulus is forthcoming. With COVID-19 cases still rising globally, investors will be paying close attention to the ECB’s December meeting for any policy shifts or announcements.

Display 1: Monthly Interest Rate Summary

Source: Bloomberg

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

Source: iMoneyNet


Bank of England1

The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.10% at its November 5 meeting. The MPC also voted unanimously to increase its target purchase of U.K. government bonds by an additional £150 billion, bringing the total to £875 billion. Central bank officials downgraded the economic forecast as England entered a four-week lockdown in November and Brexit uncertainty loomed ahead of the December 31 transition period end. The MPC believes it still has more ammunition and will continue to monitor economic and inflation data while standing ready to take “whatever additional action is necessary to achieve its remit.”

Portfolio Strategy


Fed officials kept interest rates near zero and made no changes to their asset purchases at the November FOMC. While reiterating their message from prior meetings, officials indicated that the ongoing “public health crisis will continue to weigh on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” As positive economic data continues to hit headlines, and the short end of the curve remains flush with cash, three-month LIBOR continues to break all-time lows, setting at 0.20488% on November 20. With spreads remaining tight and potential market volatility likely in the near term, we remain conservatively positioned across our funds, maintaining elevated levels of liquidity and keeping the weighted average life (WAL) below 50 days.


The November FOMC meeting had no actions announced but highlighted the impact of the virus weighing on economic activity and on the FOMC’s outlook. At mid-month, overnight repurchase agreement rates moved lower on market technicals and recovered as expected to its normal range by month-end. We continued to buy Treasury bills up to 6-month tenors and added in some 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.


The municipal bond market saw the lowest monthly issuance total of the year in November. The lower level was mostly due to issuers rushing to complete financings before the 2020 elections. The SIFMA Index, 5 which measures yields for weekly variable rate demand obligations (VRDOs), was unchanged over the course of the month at 0.11%. Yields at the longer end of the municipal money market maturity range were little changed during the month as well. A lack of clarity around fiscal aid exacerbated broader market volatility during the month.



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.

The views and opinions expressed are those of the Portfolio Management team as of November 30, 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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