Insight Article Desktop Banner
 
 
Market Insights
  •  
May 12, 2020
Central Banks Continue to Pledge Support to the Economy
Insight Video Mobile Banner
 
May 12, 2020

Central Banks Continue to Pledge Support to the Economy


Market Insights

Central Banks Continue to Pledge Support to the Economy

Share Icon

May 12, 2020

 
 

Federal Reserve Board

The Federal Open Market Committee (FOMC) decided to keep the target range for the federal funds rate unchanged at 0.00% - 0.25% at its scheduled meeting on April 29, 2020. This was the first meeting since tangible economic data had been collected on the coronavirus impact. The committee noted that the virus had catalyzed significant job losses and steep drawdowns in both consumer spending and consumer confidence. In March, the Federal Reserve (Fed) acted swiftly to respond to the potential impacts of COVID-19 by lowering rates to the lower bound while also implementing quantitative easing (QE) programs, among other facilities aimed at increasing liquidity in short-term debt markets.

In April, fears of potential coronavirus impacts were realized. First quarter gross domestic product (GDP) growth came in at -4.8% and initial jobless claims surged to around 30 million. While extraordinarily weak readings were anticipated as a result of the temporary pause across many parts of the economy, both data points underperformed expectations. Chairman Powell noted in his press conference that the current policy was appropriate while acknowledging that “the ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” The chairman also noted that the committee will “maintain this target range until it is confident that the economy has weathered recent events.”

Going forward, the Fed plans to consider health data along with traditional economic data to develop future policy actions. The committee remains committed to acting as needed to ensure the economy’s eventual recovery, as it intends to “closely monitor market conditions and is prepared to adjust its plans as appropriate.”

European Central Bank

At the European Central Bank’s (ECB) policy meeting on April 30, 2020, President Lagarde and the policy committee kept the ECB deposit rate unchanged at -0.50%. However, the ECB eased conditions on its targeted longer-term refinancing operations (TLTRO III) by lowering the rate to “50 basis points below the average interest rate of the Eurosystem’s main refinancing operations.” The ECB will continue to conduct stimulus by maintaining its Pandemic Emergency Purchase Program (PEPP) as announced in March. The ECB noted in its press release that “these purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. The Governing Council will conduct net asset purchases under the PEPP until it judges that the coronavirus crisis phase is over, but in any case until the end of this year.” At the press conference, President Lagarde said the ECB expects euro area GDP to contract between 5% and 12% in 2020.

Bank of England

Although no formal policy meeting was held in April, market participants and analysts expect the Bank of England (BOE) to further ease and/or increase stimulative policy. The BOE’s next meeting on May 7, 2020 is highly anticipated, considering the unprecedented policy actions taken by other central banks around the world.

 
 
 
DISPLAY 1: Overnight Rates
 

Source: Bloomberg

 
 

Portfolio Strategy

MSLF EURO LIQUIDITY FUND (LVNAV)

With the ECB pandemic response firmly entrenched in the “more of the same” medicine it has been using to stimulate the European economy since the sovereign debt crisis in 2014, the markets became a little uneasy about the adequacy of the ECB’s response, particularly given the limited fiscal response from some European governments. As such, risk in euro money markets continued to reprice higher in April, with 3-month Euribor climbing from -0.36% to -0.16% in the first three weeks of the month. This rise in wholesale funding rates caused the ECB to respond with further monetary stimulus, both in the form of a more attractive rate for its third version of the targeted long-term refinancing operations (TLTRO) and also an introduction of a new pandemic-specific LTRO which would not be limited in its use, meaning banks would have freedom to use the proceeds for any purpose. This should serve as a backstop to money market funding rates, and its introduction has since seen Euribor rates start to fall again. With market rates continuing to show volatility, the Fund has been defensive, continuing to build liquidity buffers and reduce its WAM, from 43 days to 33 days intra-month, before lengthening again to 37 days by month end.

MSLF STERLING LIQUIDITY FUND (LVNAV)

Following the comprehensive central bank action in March to offset the impending economic impact of the lockdown measures implemented to combat the spread of COVID-19, sterling money markets recovered gradually through April. As investor flows out of the wider money market fund sector eased in early April and funds were able to build liquidity buffers, maturities gradually started to be re-invested back into longer dates than the overnight to one week maturities that had dominated trading through most of March. The WAM of the Fund was lowered from 38 days at the end of March to as low as 30 days in middle of April, before slightly lengthening back out to 34 days by month end. The Fund also continued to see strong inflows throughout the month, increasing its asset size from £2.8 billion to £3.2 billion in April.

 
 
 
DISPLAY 2: LIBOR Rates
 

Source: Bloomberg

 
 

MSLF U.S. DOLLAR LIQUIDITY FUND (LVNAV)

Funding conditions improved throughout the month of April, with 3-month LIBOR rallying from 1.45% on March 31 to 0.56% on April 30. With the Fed indicating that it is “committed to using its full range of tools to support the U.S. economy,” while also pledging to keep rates near zero in the near term, the market is pricing in no changes to the benchmark policy rate until 2022. As assets return to Prime funds, we opportunistically extended the duration of the portfolio by purchasing longer-dated fixed-rate securities, ending the month with the weighted average maturities (WAMs) of the Fund in excess of 50 days. Going forward, we remain comfortable managing the portfolio with elevated levels of liquid assets, seeking to ensuring that we uphold our mandates of capital preservation and liquidity.

MSLF U.S. DOLLAR TREASURY LIQUIDITY FUND (PUBLIC DEBT CNAV)

In April, a massive issuance of Treasury bills hit the market to help the U.S. government fund ongoing stimulus and other aid packages. The record supply moved front-end Treasury yields higher, where the bill supply was concentrated. However, strong investor demand for short bills tempered some of the yield increase and flattened the short Treasury curve. While fund inflows moderated from the prior month, we continued to have strong industry inflows to government and Treasury money market funds, which contributed to this demand. We bought Treasury bills across our portfolio, reducing the amount of overnight repo as repo rates remain pegged at low single digits. We continue to seek to ensure high levels of liquidity and manage the portfolio to be responsive to changes in market conditions and interest rate levels.

 
 
 
Display 3: Yield Curves
 

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.

 
 
 
12 Month Performance Periods to Latest Month End (%)
 

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.

 
 
 
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 risk and reward category shown is based on historic data.

  • Historic figures are only a guide and may not be a reliable indicator of what may happen in the future.
  • As such this category may change in the future.
  • The higher the category, the greater the potential reward, but also the greater the risk of losing the investment. Category 1 does not indicate a risk free investment.
  • The fund is in this category because it invests in money market securities and the fund’s simulated and/or realised return has experienced low rises and falls historically.

This rating does not take into account other risk factors which should be considered before investing, these include:

  • The value of bonds are likely to decrease if interest rates rise and vice versa.
  • Issuers may not be able to repay their debts, if this happens the value of your investment will decrease. This risk is higher where the fund invests in a bond with a lower credit rating.
  • The fund relies on other parties to fulfill certain services, investments or transactions. If these parties become insolvent, it may expose the fund to financial loss.
  • While it is intended that the distributing share classes will maintain a share price of €1/$1/£1 this may not be achieved due to the creditworthiness of the issuers of investments held or changes in interest rates.
     

INDEX INFORMATION

One week Euro LIBID Index – One week London Interbank Bid Rate - The average interest rate which major London banks borrow Eurocurrency deposits from other banks.  One Month Euro LIBID Index – One month London Interbank Bid Rate - The average interest rate which major London banks borrow Eurocurrency deposits from other banks.  Euro Overnight Index Average (EONIA) – the standard interest rate at which banks provide loans to each other with a duration of 1 day within the Eurozone.  FTSE 1 Month Treasury Bill Index – index calculated by FTSE that is an average of the last one month Treasury bill month-end rates.  One Week USD LIBID Index – 1 week London Interbank Bid Rate - The average interest rate which major London banks borrow deposits from other banks.  One Month USD LIBID – 1 month London Interbank Bid Rate - The average interest rate which major London banks borrow deposits from other banks.  FED Funds – excess cash reserves that commercial banks and other financial institutions deposit at regional Federal Reserve banks; these funds can be onward lent to other market participants with insufficient cash on hand to meet their lending and reserve needs.  One Week GBP LIBID Index – 1 week London Interbank Bid Rate - The average interest rate which major London banks borrow deposits from other banks.  One Month GBP LIBID – 1 month London Interbank Bid Rate - The average interest rate which major London banks borrow deposits from other banks.  SONIA – the standard interest rate at which banks provide loans to each other with a duration of 1 day within the Sterling market.

DEFINITIONS

Public Debt Constant Net Asset Value (CNAV) MMF – a MMF qualifying and authorised as a Public Debt CNAV MMF in accordance with MMF Regulation which seeks to maintain a stable NAV and invests 99.5% of its assets in money market instruments issued or guaranteed by sovereign entities, reverse repurchase agreements secured with government debt and cash.  Low Volatility Net Asset Value (LVNAV) MMF – a MMF qualifying and authorised as a LVNAV MMF in accordance with MMF Regulation which seeks to maintain a stable NAV under the condition that the stable NAV does not deviate from the NAV per Share by more than 20 basis points. In case of a deviation of more than 20 basis points between the stable NAV and the NAV per Share, the following redemption or issue of Shares shall be undertaken at a price that is equal to the NAV per Share.

DISTRIBUTION

This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations. In particular, the Shares are not for distribution to U.S. persons.

Ireland: Morgan Stanley Investment Management (Ireland) Limited. Registered Office: The Observatory, 7-11 Sir John Rogerson’s, Quay, Dublin 2, Ireland. Registered in Ireland under company number 616662. Regulated by the Central Bank of Ireland. United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA. Germany: Morgan Stanley Investment Management Limited Niederlassung Deutschland 4th Floor Junghofstrasse 18-26, 60311 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy: Morgan Stanley Investment Management Limited, Milan Branch (Sede Secondaria di Milano) is a branch of Morgan Stanley Investment Management Limited, a company registered in the UK, authorised and regulated by the Financial Conduct Authority (FCA), and whose registered office is at 25 Cabot Square, Canary Wharf, London, E14 4QA. Morgan Stanley Investment Management Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 08829360968. The Netherlands: Morgan Stanley Investment Management, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of Morgan Stanley Investment Management Limited. Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Switzerland: Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0)44 588 1074.

IMPORTANT INFORMATION

EMEA: This communication has been issued by Morgan Stanley Investment Management Limited (“MSIM”). Authorised and regulated by the Financial Conduct Authority. Registered in England No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.

This document contains information relating to the sub-fund (“Fund”) of Morgan Stanley Liquidity Funds, a Luxembourg domiciled Société d’Investissement à Capital Variable. Morgan Stanley Liquidity Funds (the “Company”) is registered in the Grand Duchy of Luxembourg as an undertaking for collective investment pursuant to Part 1 of the Law of 17th December 2010, as amended. The Company is an Undertaking for Collective Investment in Transferable Securities (“UCITS”).

The Funds are not a guaranteed investment and are different from an investment in deposits. The Funds do not rely on external support for guaranteeing the liquidity of the Funds or stabilising the NAV per share. The value of investments and the income from them may go down as well as up and you may not get back the amount you originally invested.

The Funds are authorised to invest up to 100% of their assets in Money Market Instruments issued or guaranteed separately or jointly by a Sovereign Entity and by any other member states of the OECD and their central authorities or central banks subject to certain conditions. Please see Prospectus for further details.

Applications for shares in the Funds should not be made without first consulting the current Prospectus, Key Investor Information Document (“KIID”), Annual Report and Semi-Annual Report (“Offering Documents”), or other documents available in your local jurisdiction which is available free of charge from the Registered Office: European Bank and Business Centre, 6B route de Trèves, L-2633 Senningerberg, R.C.S. Luxemburg B 29 192.

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.

The views and opinions expressed are those of the portfolio management team at the time of writing/of this presentation and are subject to change at any time due to market, economic, or other conditions, and may not necessarily come to pass. These comments are not representative of the opinions and views of the firm as a whole. Holdings, countries and sectors/region weightings are subject to change daily. All information provided is for informational purposes only and should not be deemed as a recommendation to buy or sell securities in the sectors and regions referenced. Information regarding expected market returns and market outlook is based on the research, analysis, and opinions of the team. These conclusions are speculative in nature, may not come to pass, and are not intended to predict the future of any specific Morgan Stanley Investment Management investment. Past performance is no guarantee of future results.

The material contained herein has not been based on a consideration of any individual client 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.

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the applicable European or Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

MSIM has not authorised financial intermediaries to use and to distribute this document, unless such use and distribution is made in accordance with applicable law and regulation. MSIM Ireland shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary. If you are a distributor of the Morgan Stanley Liquidity Funds, some or all of the funds or shares in individual funds may be available for distribution. Please refer to your sub-distribution agreement for these details before forwarding fund information to your clients.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without MSIM’s express written consent.

All information contained herein is proprietary and is protected under copyright law.

This document may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this document in another language, the English version shall prevail.

 

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 a rising interest-rate environment, bond prices may fall. 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.

The services described on this website may not be available in all jurisdictions or to all persons. For further details, please see our Terms of Use.


Privacy & Cookies    •    Terms of Use

©  Morgan Stanley. All rights reserved.