March 25, 2021
Central Banks Hold the Line on Accommodation
March 25, 2021
Federal Reserve Board1
While no formal policy meeting occurred in February, Chairman Jerome Powell presented the Federal Reserve’s (Fed) semiannual monetary policy report to Congress. The chairman kept his prepared remarks very consistent with recent Fed language and Federal Open Market Committee (FOMC) press releases. He reiterated that the Fed is committed to maximum employment and price stability in addition to its current monetary policy stance. The next FOMC meeting will be held on March 16-17 and will feature an updated summary of economic projections.
European Central Bank1
The European Central Bank (ECB) also did not hold a formal policy meeting in February. In the upcoming March meeting, analysts expect the ECB to leave policy unchanged. Outside of policy, the ECB’s commentary on the ongoing impact of national lockdowns on economic data will be highly sought. Additionally, investors are paying close attention to any insight the ECB can offer on the European Union’s vaccine rollout and the path of the Eurozone’s economic recovery.
Bank of England1
The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.10% and leave its U.K. government bond purchase program unchanged at its February meeting. The press release noted that fourth quarter gross domestic product (GDP) growth softened as the U.K. reintroduced lockdowns to contain the spread of COVID-19 but markets have remained “resilient.” The committee expects inflation to increase in the spring, although the labor market remains “difficult to interpret.” Consistent with its prior meeting, the MPC projects GDP to increase “rapidly” as the vaccine rollout continues and restrictions are lifted. Looking ahead, the MPC believes current policy is appropriate; however, if the inflation outlook deteriorates the committee “stands ready to take whatever additional action is necessary to achieve its remit.”
MSLF EURO LIQUIDITY FUND (LVNAV)
While the Fund’s asset size and its weighted average maturity (WAM) and weighted average life (WAL) stayed broadly unchanged through the month, there was significant trading activity given the scale of flows and maturities. While our weekly liquidity was maintained at a high level, we were able to trade a number of term assets in some high quality and rare issuers at attractive levels. While we were able to replace some maturing bond assets, much of the term trading was in money market instruments, as we attempted to maintain a WAM in the high 40 days given the potential for increased excess liquidity reducing the term funding needs for European banks and putting pressure on the money market yield curve. However, with higher yields appearing in both U.S. dollar and sterling markets, we believe opportunities in euro market may still be possible, so some of the Fund’s WAM scope has been left to take advantage of these opportunities.
MSLF STERLING LIQUIDITY FUND (LVNAV)
Given the Bank of England MPC meeting in February implying that negative interest rates were highly unlikely in the U.K. for the foreseeable future, and the stronger-than-expected outlook, we anticipated that money market yield curves would soon start to steepen. As such, the Fund was managed through the month to take advantage of some longer-dated levels to keep the WAM around 50 days, but also increasing the amount of shorter-dated liquidity before it was reduced by typical month-end flows. The Fund’s asset size dropped slightly on the month due to these outflows, ending the month at just over £3 billion, which also increased the WAM to 55 days. As yield curves continue to steepen, we expect to be able to continue our strategy of maintaining good levels of liquidity whilst trading some of the higher term levels to maintain our Fund positioning.
MSLF U.S. DOLLAR LIQUIDITY FUND (LVNAV)
On the short end of the curve, an abundance of cash and an increase in reserves pushed three-month LIBOR to all-time lows, setting at 0.17525% on February 19, while clearing levels in the wholesale funding market continue to go through 3 to 5 basis points tighter. With spreads remaining tight and LIBOR and SOFR continuing to grind lower, we maintained our strategy of adding fixed rate investments to the portfolio, seeking to avoid reset risk associated with floating rate notes. Weekly liquidity in our portfolio remains elevated, in excess of 50% throughout the month.
MSLF U.S. DOLLAR TREASURY LIQUIDITY FUND (PUBLIC DEBT CNAV)
During February, yields continued to be under pressure across the curve with one-year Treasury bill yields hitting a new low of 0.07% and SOFR also marking a new low of 0.01%. This contrasts with the long end of the curve where yields pushed much higher during the month. The U.S. Treasury cut bill supply after its quarterly refunding meeting, eliminating two cash management bills from its auction schedule. We expect the continued decline of the Treasury’s cash balances and bill cuts will only pressure short rates further. While a new stimulus package is working its way through Congress, it is uncertain if bill supply will increase in the near term. We continued to buy U.S. Treasury bills and coupons while keeping a fair amount in overnight repos collateralized by U.S. Treasuries. We continue to ensure high levels of liquidity and manage the portfolio to be responsive to changes in market conditions and interest rate levels.
Past performance is not a reliable indicator of future results. The net performance data shown is calculated net of annual fees. The sources for all performance and Index data is Morgan Stanley Investment Management. Please visit our website www.morganstanley.com/im to see the latest performance returns for the fund’s other share classes.
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