Download Short Duration Market Overview

The Path To Higher Interest Rates
July 2014
For Institutional Use Only
Agenda
1. Assessing Risk: Current Market Conditions
2. Post QE/Higher Interest Rates
3. Money Market Regulatory Reform
4. Cash & Term Portfolio Overview
5. Question & Answers
2
For Institutional Use Only
Assessing Risk: Current Market Conditions
For Institutional Use Only
Coordinated Global Monetary Policy
6.0
5.0
%
4.0
3.0
2.0
1.0
0.0
Federal Reserve
4
Source: Bloomberg as of 6/30/14
For Institutional Use Only
European Central Bank
Bank of England
Bank of Japan
Central Banks Resort to Non-Traditional Policy
Federal Reserve Assets as a % of GDP
30%
Key Central Bank Assets as a % of GDP
200%
QE1
QE2
25%
QE3
180%
160%
140%
20%
120%
15%
100%
80%
10%
60%
40%
5%
20%
0%
0%
Federal Reserve Bank
5
European Central Bank
Source: Federal Reserve, Bureau of Economic Analysis, European Central Bank, Eurostat, Bank of England, UK Office for
National Statistics, Bank of Japan, Economic and Social Research Institute Japan, and Bloomberg.
For Institutional Use Only
Bank of England
Bank of Japan
Global Debt to GDP Trends
Debt as a % of GDP
250
200
%
150
100
50
0
2008
2009
2010
Eurozone
6
Source: www.tradingeconomics.com
For Institutional Use Only
China
2011
U.S.
Japan
2012
2013
Global Business Cycle in a Trend of Modest Improvement
7
*For developed economies, we use the classic definition of recession, involving an outright contraction in economic activity. For developing
economies, such as China, we have adopted a “growth cycle” definition because they tend to exhibit strong trend performance driven by
rapid factor accumulation and increases in productivity, and deviation from trend tends to matter most for asset returns. Source: Fidelity
Investments (AART), as of 6/30/14.
For Institutional Use Only
Liquidity From QE Flows into Global Markets
Bond & Equity Fund Cumulative Flows
$1,400
$1,300
$1,200
$1,100
$1,000
$900
Billion
$800
$700
$600
$500
$400
$300
$200
$100
$0
-$100
Equity
8
Source: Strategic Insight Simfund as of 5/31/14
Note: Flows include both mutual funds and ETFs
For Institutional Use Only
Bond
QE Has Driven Bond Yields and Valuations
4.5
10-Year Government Bond Yields
4.0
3.5
Yield (%)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
US
Source: Bloomberg as of 6/30/14
9
For Institutional Use Only
UK
Germany
Japan
Quest For Yield Has Driven Corporate Spreads Lower
Barclays Credit Index Sub-Sector OAS
800
Option Adjusted Spread (bps)
700
600
500
400
300
200
100
0
Industrials
10
Source: Barclays as of 6/30/14
For Institutional Use Only
Utilities
Financials
QE Has Led To Higher Equity Valuation
Index Value (Indexed to 100 at 6/30/08)
170
155
140
125
110
95
80
65
50
S&P 500
FTSE 100
DAX
Source: Bloomberg as of 6/30/14
The performance data featured represents past performance, which is no guarantee of future results.
You can not invest in an index.
11
For Institutional Use Only
Nikkei 225
QE Taper Creates Emerging Market Volatility
1100
1050
Index Value
1000
950
900
850
800
MSCI Emerging Markets Index
Barclays Emerging Markets USD Aggregate Index
Source: Barclays and Bloomberg as of 6/30/14
The performance data featured represents past performance, which is no guarantee of future results.
You can not invest in an index.
12
For Institutional Use Only
16
1.7
14
1.6
12
1.5
10
1.4
8
1.3
6
1.2
4
1.1
2
1.0
0
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
2022
2026
2030
2034
2038
2042
2046
2050
2054
2058
1.8
US Borrowers/Savers
Source: Bloomberg and Haver as of 6/30/14
13
For Institutional Use Only
12 Month Rolling Average 10-Year U.S. Treasury Yield
Yield (%)
Ratio
Demographics are an Important Driver of Interest Rates
Roadmap To Higher U.S. Interest Rates
For Institutional Use Only
A Path to Higher Interest Rates
Quantitative Easing
Taper QE
Assessment of QE
Cease Reinvestment Of Proceeds from SOMA Holdings
Normalize the Size of Balance Sheet Over Time




Traditional Monetary Policy
Modify Forward Guidance on the Federal Fund’s Rate
Drain Excess Reserves
Raise the Federal Fund’s Target Rate, IOER, RRP



15
For Institutional Use Only
Federal Reserve’s Economic Projections
2.75
Inflation Threshold
PCE YoY (%)
2.50
2.25
2.00
Inflation Forecast
1.75
1.50
1.5
Actual Inflation
1.25
1.00
Unemployment Rate (%)
8.0
7.5
7.0
6.5
6.0
6.1
Actual Unemployment Rate
Unemployment Rate Forecast
5.5
5.0
4.5
Real GDP YoY ( %)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
16
GDP Forecast
Actual GDP
Source: Bloomberg and Federal Reserve
FOMC Forecast as of 06/18/2014
For Institutional Use Only
1.5
U.S. Inflation Risks Remain Subdued
U.S. Monetary Base and Velocity
Monetary Base
Key Drivers of Inflation
Money Velocity
$ Trillions
Money Velocity
4.0
2.00x
1.95x
3.5
1.90x
3.0
1.85x
2.5
1.80x
2.0
1.75x
1.70x
1.5
1.65x
1.0
1.60x
0.5
1.55x
17
Feb-14
Aug-13
Feb-13
Aug-12
Feb-12
Aug-11
Feb-11
Aug-10
Feb-10
Aug-09
Feb-09
Aug-08
Feb-08
1.50x
Aug-07
0.0
CPI = Consumer Price Index. LEFT: Money velocity = GDP/M2. GDP = Gross domestic product. M2 = money supply measure including
currency, demand deposits, checking deposits, savings accounts, money market accounts, certificates of deposit. Monetary base = currency
plus reserves in the banking sources. Source: Federal Reserve Board, Haver Analytics, Fidelity Investments (AART) through 2/28/14. RIGHT:
Source: Bureau of Labor Statistics, Haver Analytics, Fidelity Investments (AART) as of 12/31/13.
For Institutional Use Only
Jobless Claims Heading to Pre-Recession Levels
675
Jobless Claims (thousands)
600
525
450
375
300
225
Initial Claims
18
Source: Department of Labor, Bloomberg as of 6/27/14
For Institutional Use Only
Initial Claims, 4-Week Moving Average
U.S. Labor Participation Rates Continues Downward Trend
67
Labor Force Participation Rate
Unemployment Rate
11
10
9
Participation Rate (%)
8
7
65
6
5
64
4
3
63
2
1
62
19
Source: Bureau of Labor Statistics, Bloomberg as of 6/30/14
For Institutional Use Only
0
Unemployment Rate (%)
66
Employment Creation Positive, But Not Impressive
600
Thousands of Employees
400
200
0
-200
-400
-600
-800
-1000
m/m Change in Non-Farm Payrolls
20
Source: Bureau of Labor Statistics, Bloomberg as of 6/30/14
For Institutional Use Only
6 Month Avg of m/m Chg
Post Recession U.S. Employment Recovery’s
Employment: Pre and Post Recession
Employment Level Indexed to 100 at Start of Recession
115
110
105
Most Recent
Recession
100
95
90
85
80
-6 -5.5-5.0-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6
Years Before/After Start of Recession
Source: NBER, BLS/Haver as of 4/30/14. Data represents Civilian Employment (SA, Thous).
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For Institutional Use Only
Lackluster GDP Growth Despite Historic Fed Policy
Contributions to Real GDP
(% change annualized)
8.0
6.0
4.0
2.0
%
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
Net Exports
22
Source: Bureau of Economic Analysis as of 6/25/14
For Institutional Use Only
Government
Investment
Consumption
Total
Potential Headwinds for GDP
10.0
90
85
7.5
5.0
Index Level
% Change YoY
80
2.5
75
70
65
0.0
60
-2.5
55
50
-5.0
US Personal Consumption Expenditures
U. of Michigan Survey of Consumer Confidence Sentiment
US Personal Income
23
Source: Left Chart - Bureau of Economic Analysis, Bloomberg as of 5/31/14; Right Chart – U. of Michigan Survey Research
Center, Bloomberg as of 6/30/14.
Note: Data represents % change year to year, SAAR, Bil.$
For Institutional Use Only
Higher Mortgage Rates Could Dampen Recovery
24
6.0
6,000
5.5
5,000
5.0
4,000
4.5
3,000
4.0
2,000
3.5
1,000
3.0
0
Source: Bankrate.com, Mortgage Bankers Association, Bloomberg as of 6/27/14
Note: 30-year mortgage rate represents the overnight national average.
For Institutional Use Only
Refinance Index Value
30-Year Fixed Rate (%)
30-Year Fixed Mortgage Rate vs. Refinance Index
Timeline To Higher U.S. Interest Rates
For Institutional Use Only
Consensus Builds for a 2015 Rate Hike
Federal Reserve Board Rate Expectations
Appropriate Timing of Policy Firming
Appropriate Pace of Policy Firming
(June 2014)
13
12
Number of Participants
12
3
2
3
2
Median Target Fed Funds Rate at Year End
1
1
2014
2015
Dec-2013
26
Mar-2014
Source: Federal Reserve as of 06/18/2014
For Institutional Use Only
2016
Jun-2014
Fed Meeting Date
2015
2016
Longer Run
Jun-2014
1.13
2.50
3.75
Mar-2014
1.00
2.25
4.00
Market Expectations for First Rate Hike
Forward Fed Funds Futures
1.80
1.60
Sep-13
1.40
1.20
%
1.00
Jun-14
0.80
0.60
0.40
0.20
0.00
27
Source: Bloomberg as of 6/30/14
For Institutional Use Only
May-13
Regulatory Reform Update
For Institutional Use Only
Money Market Fund Reform Timeline
2013 Key Events
Feb 2013
FSOC proposal
comment deadline
(extended from Jan 18)
Apr 2013
Sept 2013
SEC rule
proposal issued
SEC comment
deadline
Jan 2013
Feb/Mar 2013
Aug 2013
Obama names
Mary Jo White as
SEC Chairman
Mary Jo White
confirmed as
SEC Chairman
Stein and Piwowar
replace Walters and
Paredes at SEC
Future Timeline
Rule Proposal Expected
Q3/Q4 2014
Source: iMoneyNet and Fidelity as of 9/30/13
29
For Institutional Use Only
Proposed
Effective Date
for Alternative 2
Q3/Q4 2015
Proposed
Effective Date
for Alternative 1
2016 Q3/Q4
Cash & Term Portfolio Overview
For Institutional Use Only
Focus on High Quality Issuers
NCCMT Cash Portfolio
June 30, 2014
4%
June 30, 2013
8%
11%
9%
North American Banks
14%
29%
18%
Asian/Australian Banks
Eurozone
Nordic/Swiss Banks
27%
UK Banks
2%
Asset Backed CP
Other Corp/VRDN
15%
Government/Repo
13%
Finance Companies
7%
9%
7%
31
2%
8%
5%
Portfolio diversification is presented to illustrate examples of the securities that each fund
has bought and may not be representative of a fund’s current or future investments.
Each fund’s investments may change at any time. Percentages may not add up to
100 due to rounding.
Source: Fidelity Investments as of 6/30/2014
For Institutional Use Only
14%
Foreign Bank Exposure Geographically Diversified
FOREIGN BANK HOLDINGS: NCCMT CASH PORTFOLIO
60
50
Netherlands
40
Norway
% of Funds
Switzerland
Singapore
30
Germany
Canada
Japan
UK
20
Australia
Sweden
France
10
Source: Fidelity Investments as of 6/30/2014
32
For Institutional Use Only
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
0
Fund Holdings Primarily Short-Term
NCCMT CASH PORTFOLIO MATURITY SCHEDULE
35
30
25
% of Net Assets
Finance Companies
Asset Backed CP
20
UK Banks
Other Corp/VRDN
15
Nordic/Swiss Banks
North American Banks
Asian/Australian Banks
10
Eurozone
Government/Repo
5
Source: Fidelity Investments as of 6/30/2014
33
For Institutional Use Only
1-2 Years
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
0
Focus on High Quality Issuers
NCCMT Term Portfolio
June 30, 2013
June 30, 2014
1%
10%
4% 1%
11%
6%
9%
North American Banks
12%
14%
Asian/Australian Banks
12%
20%
Eurozone
Nordic/Swiss Banks
UK Banks
Asset Backed CP
Other Corp/VRDN
Government/Repo
19%
33%
34
Portfolio diversification is presented to illustrate examples of the securities that each fund
has bought and may not be representative of a fund’s current or future investments.
Each fund’s investments may change at any time. Percentages may not add up to 100 due to rounding.
Source: Fidelity Investments as of 6/30/2014
For Institutional Use Only
24%
24%
Third Quarter Investment Strategy and Outlook
Investment Strategy
• Seeking to preserve principal, maintaining liquidity and achieving superior risk-adjusted
performance
– Emphasize fundamental and macro research in formulating portfolio structures
– Meet fund liquidity targets through repurchase agreements, Treasuries, agencies and short-dated credits
– Manage weighted average maturities (WAM) and weighted average life (WAL) constraints to enhance NAV
stability and performance
– Position portfolios based on our assessment of relative value across the money market yield curve within the
context of our approved credits
Outlook
• Central Banks to maintain accommodative monetary policy to encourage economic growth
– The FOMC enhances forward guidance to a more qualitative assessment that includes a wide assortment of
inflation, labor and financial-market indicators as criteria for changing monetary policy
– US continues tapering QE that establishes a glide path to end the program in 2014
– Global growth will be led by U.S. and Germany
• Supply dynamics may keep short-term rates low in the year ahead
– Money market supply is expected to contract by about $250 billion in 2014 led by reduction in repo and agencies
– The Treasury’s Floating Rate Note (FRN) program is expected to issue $150 billion in 2014 with a reduction in
bill issuance of a similar magnitude
– The Federal Reserve’s Fixed Rate Reverse Repo should provide a leaky floor on overnight rates as the testing
period continues to experiment with program rates and participation limits
• Market volatility may present investment opportunities as we enter Fed’s tightening window
• Final rules on additional money market regulatory reform expected in 2014
35
For Institutional Use Only
Important Information
Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.
Lipper Analytical Services, Inc., is a nationally recognized organization that ranks the performance of mutual funds.
The views expressed in this statement reflect those of the portfolio manager only through the end of the period of the report as stated on
the cover and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such views are
subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These
views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors,
may not be relied on as an indication of trading intent on behalf of any Fidelity fund.
Past performance is no guarantee of future results. Investment return will fluctuate, therefore you may have a gain or loss when
you sell shares.
Diversification does not ensure a profit or guarantee against a loss.
Before investing, have your client consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for
a prospectus or, if available, a summary prospectus containing this information. Have your client read it carefully.
For Institutional Investor Use only.
Fidelity Investments & Pyramid Design is a registered service mark of FMR LLC.
Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI 02917
Not FDIC insured. May lose value. No bank guarantee.
693367.1.0
36
For Institutional Use Only