Insight Article Desktop Banner
Market Insights
April 28, 2023

Powell Doesn’t Flinch as Banks Collapse

Insight Video Mobile Banner
April 28, 2023

Powell Doesn’t Flinch as Banks Collapse

Market Insights

Powell Doesn’t Flinch as Banks Collapse

Share Icon

April 28, 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 4.75% to 5.00% at the conclusion of its March meeting. During the month, several high-profile regional banks came under significant pressure to meet withdrawals. The Federal Reserve (Fed) and U.S. Treasury acted swiftly, securing uninsured deposits and preventing widespread contagion by announcing a newly created Bank Term Funding Program. The new facility made additional funding available to ensure banks have the ability to meet the needs of their depositors. On the back of this announcement, the FOMC press release noted that the U.S. banking system is “sound and resilient,” but these stresses are likely to result in tighter financial conditions and impact economic activity.

The March meeting included an update of the Fed’s 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%. The 2023 median gross domestic product (GDP) growth projection was downgraded 10 basis points to 0.4%. The 2024 GDP growth forecast was downgraded as well to 1.2%. The 2023 unemployment rate estimate decreased 10 basis points to 4.5%. The Fed increased its median 2023 personal consumption expenditure (PCE) inflation forecast to 3.3% in March, from 3.1% in December. The 2024 PCE projection was unchanged at 2.5%.

European Central Bank1
At the European Central Bank’s (ECB) policy meeting on March 16, President Lagarde and the policy committee increased the ECB deposit rate by 0.50% to 3.00%. The ECB updated its economic projections and now see inflation ending the year at 5.3%, then trending lower to 2.9% at the end of 2024. The committee has upgraded its projections for growth, which now sits at 1.0% for 2023 and moves upward toward 1.6% at the end of 2024. The committee remains dedicated to reducing inflation back to the 2% target and reiterated its “data-dependent” stance moving forward.

Bank of England1
The Bank of England (BoE) Monetary Policy Committee (MPC) voted 7-2 to increase the Bank Rate by 0.25% to 4.25% at its March meeting. The two dissenting members preferred to keep the rate unchanged at 4.00%. MPC members believe inflation is likely to decline more in the second quarter of 2023 than anticipated in February. The press release noted that GDP broadly has been flat to start 2023 but is expected to increase “slightly” in the second quarter. Reaffirming its stance from the prior month’s meeting, the BoE is monitoring economic conditions and adjusting policy as needed as it focuses on bringing down inflation.

Display 1: Monthly Interest Rate Summary as of 3/31/23.

Source: Bloomberg

Display 2: MSILF Weighted Average Maturities (WAM) Summary as of 3/31/23.2

Source: iMoneyNet 



Government/Treasury Strategy
We took advantage of the mid-month spike in volatility to add some callable agency debt across our portfolios, extending duration along with our peers into the mid-teens. To offset some of this extension, we also used the abrupt rally in interest rates to exit some legacy positioning in the portfolio.

The Federal Reserve expressed comfort with the handling of the Silicon Valley Bank (SVB)-led banking crisis in March, and toward the end of the month began to reiterate that the fight against inflation is not over. We expect the Fed to be nearing the end of its rate hiking cycle, but likely unwilling to change stance until officials see tangible evidence in either the jobs market or the inflation data. This likely argues for one or two more rate hikes followed by an extended period where rates remain at elevated levels and the lagged effects of recent tightening take hold.

Overall, we have no concerns with liquidity in the Treasury bill market currently. T-bill issuance sizes will likely begin to decrease as tax receipts come in and debt ceiling considerations come into play. Additionally, Treasury auctions have been orderly, and the SVB banking crisis in mid-March brought an onslaught of supply from the Federal Home Loan Bank system. Ample cash in the system was able to opportunistically scoop up this supply, and following that massive front-loading of issuance, agency supply has since quieted down. The U.S. Treasury has continued to use cash-management bills periodically to meet funding needs as they arise.

Looking ahead, we believe debt ceiling considerations will continue to grow in relevance as we approach summer. Currently, the late-July and early-August portion of the bill curve is reflecting concern about the “X-date,” the day when the U.S. government may no longer be able to meet all of its debt obligations.

Prime Strategy
In March, spreads widened intra-month as liquidity became scarce and investors stayed on the sidelines amid the banking sector turmoil. We remain cautiously optimistic that liquidity will continue to normalize as investors deploy excess cash and issuers return to the market following quarter-end.

The portfolios’ WAM and WAL decreased month-over-month as we increased our liquidity profile due to volatility in the financial sector. While spreads widened across the curve in the second half of the month, we felt it was more prudent to hold elevated levels of liquidity as opposed to taking advantage of market opportunities.

As we approach the likely end to this monetary tightening cycle, we find value in both fixed- and floating-rate securities across the money market curve. Spreads remain wide, and if the updated Fed dot plots look to be accurate—potentially hiking one more time and then holding rates constant throughout the rest of the year—then extending both duration and spread duration offers attractive opportunities right now. For longer-dated maturities we continue to prefer floating-rate securities as we believe they offer a measure of downside mitigation in the event the Fed tightens more than anticipated by the market.

Tax-Exempt Strategy3
In March, short-term municipal securities saw yet another significant spike in rates. The SIFMA Index,4 which measures yields for weekly variable rate demand obligations (VRDOs), rose 176 basis points to finish the month at 3.97%. Yields at the longer end of the municipal money market maturity range rose as well over the month. As sentiment regarding the stability of the financial sector continues to improve, short end rates have begun to tighten back. Going into tax season, we believe rates will likely remain elevated as investors sell tax-exempt money funds to raise cash in order to meet tax payments.

The WAM on the portfolio shortened in March as tax-exempt commercial paper rolled down and we looked to raise liquidity in stressed market conditions. 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.

Uncertainty around the Federal Reserve, the stability of the financial sector and the geopolitical landscape will likely continue to weigh on the market. Municipal yield movements are closely tracking the Treasury market’s high volatility, and it will likely require a calming of that volatility, as well as a more favorable technical municipal backdrop, to reignite persistent market conviction and sustained outperformance.


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.

4The 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 March 31, 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.

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.



This is a Marketing Communication.

Check the background of our firm and registered representatives on FINRA's BrokerCheck

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.

It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

Not FDIC Insured—Offer No Bank Guarantee—May Lose Value
Not Insured By Any Federal Government Agency—Not A Deposit

Subscriptions    •    Privacy & Cookies    •    Your Privacy Choices Your Privacy Choices Icon    •    Terms of Use

©  Morgan Stanley. All rights reserved.

Morgan Stanley Distribution, Inc. Member FINRA/SIPC.