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February 22, 2021

New Year Begins Where Last Year Left Off

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February 22, 2021

New Year Begins Where Last Year Left Off

Market Insights

New Year Begins Where Last Year Left Off

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February 22, 2021


Federal Reserve Board1

As expected, the Federal Open Market Committee (FOMC) held the range for the federal funds rate steady at 0.00% to 0.25% at the conclusion of its January meeting. In addition, forward guidance and quantitative easing policy were left intact. While much was left unchanged, the Federal Reserve (Fed) tweaked its view on economic conditions. The Fed has continued to acknowledge the ongoing economic recovery in prior language, but its January statement noted, “the pace of the recovery in economic activity and employment has moderated in recent months.” The Fed views its current policy stance as appropriate “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

Display 1: Monthly Interest Rate Summary

Source: Bloomberg


European Central Bank1

At the European Central Bank’s (ECB) policy meeting on January 21, President Lagarde and the policy committee kept the ECB deposit rate unchanged at -0.50%, as expected. After increasing the size of its quantitative easing programs in December, the ECB left the facilities unchanged at its January meeting. While President Lagarde expects gross domestic product to recover somewhat in 2021, the ECB reasserted its readiness to act, saying, “The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.”

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

Source: iMoneyNet


Bank of England1

Although no formal policy meeting was held in January, analysts expect the Bank of England (BOE) to leave policy unchanged in February. While expectations have been subdued, investors will want to pay attention to the BOE’s guidance on how the national lockdown and vaccine rollout are affecting economic conditions.

Portfolio Strategy


Fed officials kept interest rates near zero and made no changes to their asset purchase program at the January FOMC meeting, indicating they would maintain the current pace of buying until “substantial further progress toward its employment and inflation goals have been met.” An abundance of cash in the short end of the curve pushed three-month LIBOR to all-time lows, setting at 0.20188% at month-end. With spreads remaining tight and LIBOR4 and SOFR5 continuing to grind lower, we maintain our strategy of adding fixed-rate investments to the portfolio, avoiding the reset risk associated with floating-rate notes. Weekly liquidity in our portfolios remain elevated, in excess of 50% throughout the month.


Front-end yields remained unchanged through most of January, with Treasury bill yields moving 1 basis point lower toward month-end. During the second half of the month, overnight repo rates softened as government-sponsored enterprise cash and other market technicals forced repo and other short rates lower, underscoring the amount of liquidity in the market. SOFR hit a record low of 0.03% before snapping back higher. Our strategy continued to buy U.S. Treasuries across the curve and added some term repurchase agreements. We continue to ensure high levels of liquidity and manage the portfolios to be responsive to changes in market conditions and interest rate levels.


At the short end of the curve, yields for variable rate demand obligations (VRDOs) fell during the month of January after being largely unchanged during December. The SIFMA Index,7 which measures yields for weekly VRDOs, fell from 0.09% at the end of December to finish the month at 0.04%. Yields at the longer end of the municipal money market maturity range trended lower during the month while supply remained constrained. The Bloomberg BVAL One-Year Note Index8 finished the month at 0.11%, down 0.02% from the prior month-end. While technicals have largely been responsible for rich muni market levels, solid revenue performance, federal aid and prospects for added support from the Biden administration and Democratic-controlled Congress have fueled significant spread compression. In the period ahead, we will we watch to see how monetary policy unfolds and determine what impact it may have on municipal yields.


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 London Interbank Offered Rate (LIBOR) is the short-term interest rate that banks charge one another and that is generally representative of the most competitive and current cash rates available.

5 The Secured Overnight Financing Rate (SOFR) is a benchmark rate for US dollar-denominated loans and securities based on overnight transactions in the U.S. Treasury repurchase market.

6 Government and Treasury Funds are Stable NAV funds.

7 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.

8 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.

The views and opinions expressed are those of the Portfolio Management team as of January 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.

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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