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March 15, 2023

Full Steam Ahead

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March 15, 2023

Full Steam Ahead

Market Insights

Full Steam Ahead

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March 15, 2023


Federal Reserve Board1
The Federal Open Market Committee (FOMC) voted unanimously to increase the federal funds target rate by 0.25% to a range of 4.50% to 4.75% at the conclusion of its February meeting. The statement was relatively unchanged from the prior month, but FOMC members noted that further rate hikes are necessary. The February FOMC meeting notes showed that “a few” participants preferred a 0.50% rate hike. The committee believes upside risks to inflation remain present. February economic data came in stronger than expected, shifting market forecasts to a fed funds terminal rate of around 5.4%.1

European Central Bank1
At the European Central Bank’s (ECB) policy meeting on February 2, President Lagarde and the policy committee increased the ECB deposit rate by 0.50% to 2.50%. The accompanying press release stated the ECB “intends” to continue raising the deposit rate by 0.50% at its next meeting. The Governing Council will reduce the size of the asset purchase program (APP) by €15 billion a month from March to June. The committee reiterated it will remain “data-dependent” moving forward when assessing the future path of policy rates.

Bank of England1
The Bank of England (BoE) Monetary Policy Committee (MPC) voted 7-2 to increase the Bank Rate by 0.50% to 4.00% at its February meeting. The two dissenting members preferred to keep the rate unchanged at 3.50%. The BoE noted that market expectations see the Bank Rate moving toward a terminal rate of 4.5% by mid-year. Considering consumer price index annual calculations, the MPC believes inflation will decline significantly from the 10.1% level in January as elevated energy and goods prices roll off. The central bank is keenly focused on upcoming inflation data, which will dictate the future path of the Bank Rate.

Display 1: Monthly Interest Rate Summary as of 2/28/23.

Source: Bloomberg

Display 2: MSILF Weighted Average Maturities (WAM) Summary as of 2/28/23.2

Source: iMoneyNet 



Government/Treasury Strategy
February reminded the market that the path to stable inflation is not a straight line and the process will likely remain choppy. Our view is that the Fed is still far from claiming victory—and, if anything, officials will need to reinforce the “higher for longer” theme at the March 22 FOMC meeting, as well as present a revised dot plot conveying this message. Pricing in the back half of February began to reflect this reality as financial conditions tightened again.

Auctions have been orderly, and long-dated auctions (1-year bill) have been very well subscribed. As six-month auctions find themselves maturing in August, money market funds generally have been more cautious about adding to these late-summer maturities. Relatively less risk-sensitive, yield seeking investors, however, have kept these auctions from being too erratic so far. Late-month macro volatility has brought a firm bid back to short-dated bills (those maturing inside of one month).

Federal Reserve policy remains paramount—the Fed downshifted to a 25-basis point hike on February 1, but data globally has reaccelerated since then. This resilience will test the Fed’s steadfastness in sticking with 25-basis point hikes moving forward.

Debt ceiling considerations have started to percolate through our market and will continue to do so as the year progresses. Currently, it is still early in the process with new information coming out each week. While liquidity remained ample with plentiful supply, it is likely to be volatile amid the debt ceiling negotiations. Reverse repo (RRP) balances remain high and there is capacity to extend if needed.

In this environment, there were no material changes to our investment thesis. The portfolios’ weighted average maturity (WAM) and weighted average life (WAL) remained close to peers and on the shorter end of the spectrum, as we expect more rate hikes to come.

Prime Strategy
February saw spreads continued to grind lower throughout the month and remain near recent tights. Against this backdrop, we allowed the portfolios to organically roll down with zero opportunity cost as majority of Fund investments mature near the March FOMC meeting. Overall, market liquidity remained stable in the month, with ample supply and unconstrained dealer balance sheets.

While spreads can widen rapidly during times of market stress, we currently don’t see any immediate macro catalyst pushing spreads wider. From an investment perspective, we need to remain patient and disciplined when spreads are tight and only deploy capital if we believe the investment is being compensated for both interest rate and credit risk.

Monetary policy remains the key driver of portfolio composition and positioning. We still think daily resetting floating-rate notes offer the most attractive opportunity because their coupons continue to reset higher as Fed tightens monetary policy, while also remaining at an elevated level once the Fed reaches the terminal rate. Floating-rate notes can also offer a buffer from interest rate risk as coupons continue to reset if the Fed tightens by more than the market anticipates.

Tax-Exempt Strategy3
Short-term municipals saw a significant spike in rates in February, recovering from the drop rates in January. The SIFMA Index,4 which measures yields for weekly variable rate demand obligations (VRDOs), rose 176 basis points to finish the month at 3.42%. The longer end of the municipal money market maturity range rose as well over the course of the month. The Bloomberg BVAL One-Year Note Index5 increased 83 basis points, finishing the month at 3.17%. As we head into tax season, we believe rates will likely rise as investors sell tax-exempt money funds to raise cash in order to meet tax payments.

Municipal credit quality continues to remain solid, and higher employment, increasing wages and rising property values have all served to bolster tax receipts. In general, municipal bonds as an asset class are also considered more defensive than most others during times of economic stress. State and local governments budget in advance, and it takes some time for economic downturns to start affecting their balance sheets— even more so for local municipalities that rely heavily on property taxes. Housing property tax receipts typically decline years after economic shocks, as it takes time for home values to be reassessed.

We continue to place an emphasis on maintaining high levels of liquidity with diligent oversight of credit quality, portfolio maturity and diversification. The WAM on the portfolio shortened in February as tax-exempt commercial paper rolled down. Overall, we believe the portfolio is well positioned for a rising rate environment, with a short duration and high concentrations in VRDOs and floating-rate securities.


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 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.
5 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 February 28, 2023 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.

One basis point = 0.01%

The Bloomberg U.S. Municipal Bond Index is an index that covers the USD-denominated long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. It is composed of approximately 1,100 bonds.

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 outlooks 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.

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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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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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