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December 14, 2022

To Restrictive and Beyond

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December 14, 2022

To Restrictive and Beyond

Market Insights

To Restrictive and Beyond

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December 14, 2022


Federal Reserve Board1
At its November meeting, the Federal Reserve (Fed) increased its federal funds target rate by 0.75% at for the fourth consecutive time. The Fed continues to progress on its path to “sufficiently restrictive” policy, and there were several high-profile economic data releases of note throughout the month. Third quarter gross domestic product (GDP) exceeded expectations with an increase of 2.9% (annualized), and monthly non-farm payrolls also surpassed expectations. Speaking at the Brookings Institute at the end of November, Chair Powell said, “The time for moderating the pace of rate increases may come as soon as the December meeting.” The Federal Open Market Committee (FOMC) is paying close attention to the impacts of its policy as the economy starts to absorb 4.00% of interest rate hikes implemented so far this year. Market participants expect rates to increase by 0.50%* in December.

European Central Bank1
Although no formal policy meeting was held in November, analysts expect the European Central Bank (ECB) to hike rates in December. The ECB continues to wrestle with persistent inflation and demand as risks of a recession increase.

Bank of England1
The Bank of England (BoE) Monetary Policy Committee (MPC) voted 7-2 to increase the Bank Rate by 0.75% to 3.00% at its November meeting. Risks remain skewed to the upside in the near term as the Bank of England attempts to prevent inflation from becoming completely entrenched. The MPC expects GDP growth to decline as tighter financial conditions and elevated energy prices dampen spending. The BoE is committed to bringing inflation down and expects it to begin declining in mid-2023. The committee stands ready to act “forcefully” if the inflation becomes more ingrained.

Display 1: Monthly Interest Rate Summary as of 11/30/22.

Source: Bloomberg

Display 2: MSILF Weighted Average Maturities (WAM) Summary as of 11/30/22.2

Source: iMoneyNet 



Prime Strategy3
The two main takeaways from the November FOMC meeting were that Chair Powell laid the foundation to downshift to a smaller 50 basis point rate hike at the upcoming December meeting and that officials expect the terminal rate to be higher than previously anticipated. As of November 30, the market was fully pricing in a 50 basis point rate hike in December and another 50 basis points worth of tightening in early 2023. While we remain comfortable with high allocations to SOFR (secured overnight financing rate) floating-rate notes and elevated levels of weekly liquidity, which contributes to our short duration profile, throughout the month we took opportunities to add duration to the portfolios, with our weighted average maturity (WAM) extending from 8 days to 15 days month-over-month.

Government/Treasury Strategy
At the November FOMC meeting, Chair Powell left the door open to reducing the pace of hikes at future meetings, but clarified it was premature to consider a “pause” in hikes. This meeting shifted the narrative in markets, from a rapid hiking slope to a measured one, albeit leading to a higher terminal rate. Although Fed speakers reinforced this posture during the month, the lower-than-expected inflation report caused markets to latch onto the pivot narrative and financial conditions eased significantly by the end of the month. Ahead of the blackout period, Fed officials closed November continuing to stress that inflation remains a major issue, and many in the market still forecast a terminal rate of 5% to 5.25% as a highly likely outcome.

Tax-Exempt Strategy
November municipal bond issuance hit a 23-year low, as total volume for the month dipped below $20 billion.  Issuance declined 47% year-over-year as issuers dealt with continued market volatility and uncertain Fed policy. As a result, municipal bonds saw the best performance in November in decades. The Bloomberg Municipal Index ended the month in the positive by 4.68%.

At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) decreased during the month, driven lower by a preference for shorter duration assets. The SIFMA Index,4 which measures yields for weekly VRDOs, declined 53 basis points to finish the month at 1.85%. Yields at the longer end of the municipal money market maturity range also fell over the course of the month. The Bloomberg BVAL One-Year Note Index5 decreased 56 basis points, finishing the month at 2.47%. We believe our portfolio is well positioned for a rising rate environment, maintaining a short duration with 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 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 November 30, 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.

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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.

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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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