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February 25, 2022

Fed Signals Lift Off

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February 25, 2022

Fed Signals Lift Off

Market Insights

Fed Signals Lift Off

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February 25, 2022


Federal Reserve Board1

The Federal Open Market Committee (FOMC) voted unanimously to keep the federal funds rate unchanged at a range of 0.00% to 0.25% at the conclusion of its January meeting. With inflation running higher than expected, Chairman Powell and the committee signaled higher rates are on the horizon, saying, “it will soon be appropriate to raise the target range.” Market data currently expects the first interest rate hike in March. In his press release, the chairman illustrated that the Federal Reserve’s (Fed) balance sheet was larger than it needed to be. While the FOMC states the federal funds rate will be its main policy driver, it also is expected to reduce the size of the balance sheet later in the year. At the prior meeting in December, the Fed accelerated winding down its asset purchase program, and this is still expected to be completed in March.

European Central Bank1

The European Central Bank (ECB) did not hold a formal policy meeting in January. However, investors will want to pay close attention to the ECB’s February meeting as inflation gauges have topped expectations, which could lead to a shift in ECB monetary policy. The ECB has already started reducing its monthly asset purchases.


Bank of England1

Although no formal policy meeting was held in January, analysts expect the Bank of England to increase rates 0.25% in February. The Bank of England is paying close attention to inflation data, which has exceeded expectations, while the COVID-19 surge driven by the omicron variant had a muted impact on gross domestic product in the fourth quarter.

Monthly Interest Rate Summary as of 1/31/22

Source: Bloomberg

MSILF Weighted Average Maturities (WAM) Summary as of 1/31/22

Source: iMoneyNet 



Prime Strategy3

Following Chairman Powell’s press conference, the market is now pricing in almost five rate hikes in 2022, with an initial hike anticipated at the upcoming March meeting. On the back of hawkish Fed comments, the 2-year Treasury yield touched a recent high of 1.18% on month-end, an increase of 45 basis points from the year-end setting of 0.73%. With spreads tightening throughout January following year-end technical pressures in the wholesale funding market, we remained patient and allowed our portfolios’ maturity profiles to organically roll down. Our portfolios ended the month with WAMs (weighted average maturity) on the lower end of the peer group and with weekly liquidity near 55%.

Government/Treasury Strategy4

Markets continued to reprice for multiple interest rate hikes this year. While yields on the very short end of the curve remain in single digits, Treasury bill and agency yields moved higher for maturities beyond the March FOMC meeting date. We feel well positioned across our portfolios for an interest rate hike in March, as our portfolio durations continued to roll in and remain shorter than most peers. We have minimal fixed-rate positions beyond late March, as we either sold positions outright or swapped out of fixed-rate for floating-rate agencies indexed off SOFR. In our repo funds, we have a large amount of overnight repurchase agreements, which we believe can benefit the next day from a rate hike as repurchase rates move up immediately. We continued to manage the portfolios to be responsive to changes in market conditions and interest rate levels.

Tax-Exempt Strategy3

January municipal bond issuance declined 14.7% year-over-year,5 led by a steep drop in taxable and refunding

volumes amid the extreme volatility and a rising-rate environment. The Bloomberg Municipal Bond Index dropped 2.7% in January, the worst monthly performance since March 2020. It was also the index’s worst January performance in data going back to 1980 according to Bloomberg.

At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) declined during January as investors sought refuge in very short-term obligations. The SIFMA Index,6 which measures yields for weekly VRDOs, dropped 4 basis points to finish the month at 0.06%. Conversely, yields at the longer end of the municipal money market maturity range rose significantly over the course of the month. The Bloomberg BVAL One-Year Note Index7 increased 49 basis points, finishing the month at 0.66%.


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: Morgan Stanley Investment Management. As of January 31, 2022.

5 Source: Bloomberg

6 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.

7 The Bloomberg BVAL One-Year Note Index represents tax-exempt municipal bonds that have an average rating of AAA by Moody’s and S&P. “Bloomberg®” and the Bloomberg Index/Indices used are service marks of Bloomberg Finance L.P. and its affiliates, and have been licensed for use for certain purposes by Morgan Stanley Investment Management (MSIM). Bloomberg is not affiliated with MSIM, does not approve, endorse, review, or recommend any product, and does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any product.

The views and opinions expressed are those of the Portfolio Management team as of December 31, 2021 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.

The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass.  Information regarding expected market returns and market outlookns is based on the research, analysis and opinions of the authors or investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.

This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.

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.

Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

This material is not a product of Morgan Stanley’s Research Department and should not be regarded as a research material or a recommendation. 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.

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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.

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