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January 25, 2023

Going, Going, Gone

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January 25, 2023

Going, Going, Gone

Market Insights

Going, Going, Gone

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January 25, 2023


Federal Reserve Board1

The Federal Open Market Committee (FOMC) voted unanimously to increase the federal funds target rate by 0.50% to a range of 4.25% to 4.50% at the conclusion of its December meeting. The press release was largely unchanged. Committee members continued to express concerns about persistent inflation and low unemployment as they pursue implementing “sufficiently restrictive” monetary policy.

The December meeting included an update of the Federal Reserve’s (Fed) summary of economic projections. The Fed’s dot plot showed officials’ median projection for the benchmark rate at the end of 2023 is approximately 5.1%, up 50 basis points since the September meeting. The 2023 median gross domestic product (GDP) growth projection was downgraded 70 basis points to 0.5%. The 2024 GDP growth forecast was downgraded as well to 1.6%. The 2023 unemployment rate estimate increased 20 basis points to 4.6%. The Fed increased its median 2023 personal consumption expenditure (PCE) inflation forecast to 3.1% in December, from 2.8% in September. The 2024 PCE projection increased to 2.5% from 2.3%.

European Central Bank1

At the European Central Bank’s (ECB) policy meeting on December 15, President Lagarde and the policy committee increased the ECB deposit rate by 0.50% to 2.00%. The committee continues to view policy rate increases as necessary based on “substantial upward revision to the inflation outlook.” Inflation appeared to be 10% in November following its 10.6% print in October. The ECB said it will continue to raise rates “significantly further” to stave off inflation.

Bank of England1

The Bank of England (BoE) Monetary Policy Committee (MPC) voted 6-3 to increase the Bank Rate by 0.50% to 3.50% at its December meeting. Two of the three dissenting members preferred to keep the rate unchanged while the remaining dissenter preferred increasing the Bank Rate by 0.75% to 3.75%. Inflation remains way too high, coming in at 10.7% in November, but the latest reading was better than expected. Expectations have started to turn slightly as the BoE now expects U.K. GDP to decline by 0.10% in the fourth quarter, a 0.20% improvement from November. The MPC is committed to reducing inflation before it becomes completely entrenched and understands risks globally remain elevated and skewed to the upside.

Display 1: Monthly Interest Rate Summary as of 12/31/22.

Source: Bloomberg

Display 2: MSILF Weighted Average Maturities (WAM) Summary as of 12/31/22.2

Source: iMoneyNet 



Prime Strategy3

With expectations that the Fed will continue to tighten monetary policy in the near term but reach the terminal rate shortly, we remain comfortable managing the portfolios with elevated levels of liquidity and high allocations to daily resetting SOFR (secured overnight financing rate) and OBFR (overnight bank funding rate) floating-rate notes. We opportunistically added fixed rate exposure out through the 6-month tenor when there has been a dislocation in market offers. The weighted average maturity (WAM) extended marginally to 18 days as of year-end.

Government/Treasury Strategy

Supply events in December were favorable for opportunistically adding Treasury floating-rate note exposure across our book, as markets continued to price in the Fed’s likely need to continue hiking and then hold rates at an elevated level for a reasonable period of time. Additionally, year-end dynamics and collateral needs allowed for a high amount of relative value trading in Treasuries, as we were able to lighten up on some short-dated, richly valued T-bills while adding attractive yields slightly further out the curve. In agencies, we added some shorter-dated floating-rate exposure. However, broadly speaking, agency spreads tightened into year-end and offered a less attractive opportunity than earlier in the fourth quarter.

Tax-Exempt Strategy

Total 2022 municipal bond sales volume plunged 21% from 2021, as issuers were flush with cash and rising interest rates curtailed refundings and taxable issuances.4 December municipal bond issuance, at $17.165 billion, also disappointed, dropping 58.1% from the same period a year earlier.5

At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) increased significantly during the month as inventories rose significantly and dealers hiked rates in an effort to reduce inventories at year-end. The SIFMA Index,6 which measures yields for weekly VRDOs, rose 181 basis points to finish the month at 3.66%. 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 Index7 increased 35 basis points, finishing the month at 2.82%. Our portfolio is well positioned for a rising rate environment, with a short duration and high concentrations in VRDOs.


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: Bloomberg L.P. Data as of December 31, 2022.

5 Source: Bloomberg L.P. Data as of December 31, 2022.

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, 2022 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.

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.

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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