February 26, 2021
New Year Begins Where Last Year Left Off
February 26, 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.”
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.”
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.
MSLF EURO LIQUIDITY FUND (LVNAV)
January, as ever, saw the Fund unwind its year-end positioning by shifting focus back to daily maturing assets and out of weekly liquidity by allowing many of our January Treasury bill investments to mature off into overnight. This meant the yield of the Fund quickly recovered from the December dip caused by the dramatic drop in issuance and increase in demand from huge excess liquidity and the increase in assets under management in the sector. Consequently, the Fund’s WAM dropped back towards the mid-40s as maturities were rolled into overnight and used to meet some early year client redemptions. The Fund size has dropped to around €9.5 billion in assets, but remains well above last year’s average.
MSLF STERLING LIQUIDITY FUND (LVNAV)
Following the turmoil caused by year end, the Fund looked to build up liquidity reserves again in January after a combination of reducing liquidity due to balance sheet constraints and natural outflows had caused the liquidity figures to drop below our normal amounts. The yield curve remained broadly flat or even inverted in some cases, as markets anticipated the possible confirmation of negative interest rates by the BOE. In this environment, there were very few opportunities missed as overnight deposits and repo levels remained some of the best yields available in short-term funding markets. The Fund’s WAM was reduced from its year-end highs back to 50 days as we anticipated the February BOE meeting and some possible repricing of the yield curve.
MSLF U.S. DOLLAR LIQUIDITY FUND (LVNAV)
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 LIBOR and SOFR 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.
MSLF U.S. DOLLAR TREASURY LIQUIDITY FUND (PUBLIC DEBT CNAV)
Front-end yields remained unchanged through most of January, with Treasury bill yields moving 1 basis point lower towards 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 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.
Institutional Distributing and Institutional Accumulation Share Class Risk and Reward Profile