Download Liquidity Markets Overview

Liquidity Markets
Overview
February 29, 2012
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Macroeconomic Review – Growth and Inflation Factors
Economic and Interest Rate Review
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
Quarterly GDP Growth
Annual GDP Growth
LEI Index
Headline CPI
Core CPI
Jan-12
Sep-11
Jan-11
May-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
650
600
550
500
450
400
350
300
250
200
150
100
50
0
Sep-06
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
May-06
 Inflation remains benign. Year-on-year growth in headline CPI, the broad basket
of goods and services used by the Bureau of Labor Statistics to compute
consumer prices, ended 2011 at 3% and posted a 2.9% reading in January of
this year, while the same measure for the same basket of goods, only excluding
the historically more volatile food and energy components, grew at a 2.2% pace
by the end of 2011 and 2.3% for the 12 months ending in January of this
year. More broadly, commodity prices, which generally fell over the course of
2011, started picking up again late in the year, led mostly by rising oil prices, and
this trend has extended into early 2012. As the bulk of the world’s major
economies are either stagnating (U.S. and Japan) or outright shrinking (the
Eurozone as a whole), the future path of commodity prices will continue to be
determined mainly by China’s output. China is revising downward its projection
of national output to a level below 8% for the first time in a decade.
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Jan-06
 The second half of 2011 was a period of expanding national output, with 9/30/11
GDP posting 1.8% annualized quarter-on-quarter growth and 12/31/11 GDP
expanding at a 3.0% annualized quarter-on-quarter pace. As the first half of the
year was more stagnant, year-end GDP growth, on a year-over-year basis, sat at
1.6%, hardly robust, but showing positive momentum. Better second-half
numbers should continue to exert upward pressure on year-on-year GDP growth
for the first half of 2012. Stagnating leading economic indicators and a projected
slowdown of the economy in the second half of the year, due to both the higher
costs associated with the implementation of “Obamacare” and the rollback of the
Bush-era tax cuts, should serve to keep GDP growth moderate. We are
projecting first-quarter 2012 GDP to grow at a slightly slower 1.5% annualized
rate, second-quarter GDP to rebound sharply to a 2.5% – 3.0% annualized rate,
and then a slight slowdown in the second half of the year to the 2.4% – 2.7%
area.
CRB Index
Chart source: Bloomberg as of February 29, 2012. Past performance is no guarantee of future results.
For institutional use only. Distribution to any other audience is prohibited.
1
Macroeconomic Review – Jobs Picture
Economic and Interest Rate Review
12.00%
600,000
400,000
200,000
(200,000)
(400,000)
(600,000)
(800,000)
(1,000,000)
10.00%
6.00%
4.00%
2.00%
0.00%
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
 Below the surface, the employment situation is showing some structural
difficulties. As is shown in the lower chart, between its peak in March 2007 and
its relative trough in December 2009, the economy lost most than 6 million jobs
among those people without a college degree. From its relative peak in February
2008 to a trough in February 2009, college degreed workers lost only 1.2 million
jobs. Since these respective troughs, the economy has added 2.2 million jobs for
the college degreed but only 901,000 for those workers who didn’t graduate from
college. Presumably, those workers without college degrees have been
employed in the manufacturing and construction industries. Manufacturing
employment in the U.S. has been falling for decades, as we’ve deindustrialized
the nation, shipping manufacturing jobs offshore in search of cheap
labor. Construction employment had always picked up the slack, providing jobs
for undereducated workers. Since its peak in April 2006, the construction
industries have been working through a glut of overbuilding. Finding employment
for these undereducated workers will require a resurgence of U.S.-based
manufacturing, a reawakening of the construction industries, or significant and
time-consuming retraining, none of which appear to be quick fixes for this
structural employment issue. This proposition is likely also weighing heavily on
the Fed.
8.00%
Unemployment
Non-Farm Payroll Change
84,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
82,000
80,000
78,000
76,000
74,000
72,000
Jan-95
Dec-95
Nov-96
Oct-97
Sep-98
Aug-99
Jul-00
Jun-01
May-02
Apr-03
Mar-04
Feb-05
Jan-06
Dec-06
Nov-07
Oct-08
Sep-09
Aug-10
Jul-11
 With inflation in check, the dual nature of our Central Bank’s mandate is such that
the Federal Reserve is tasked with pursuing policies that promote full
employment. The U.S. jobs situation is looking better, at least on the surface, as
the nation’s unemployment has fallen from its peak of 10.0% in October of 2009
to 8.5% at year-end 2011 and even further to 8.3% as of the end of January 2012
(8.26% on an unrounded basis). January 2012 saw the creation of 243,000 jobs,
per the Bureau of Labor Statistics’ Nonfarm Payroll Report, the highest level of
monthly job creation seen since March and April 2011 and, before that, May
2010. A reslowing of the domestic economy should make job creation more
difficult by the second half of 2012, a factor, along with the European
financial/sovereign debt situation, that likely explains the Fed’s proclamation of
sustained monetary accommodation until at least late 2014.
Non-College Educated Employment
College Educated Employment
Numbers in Thousands
Chart source: Bloomberg as of February 29, 2012. Past performance is no guarantee of future results.
For institutional use only. Distribution to any other audience is prohibited.
2
Interest Rate Environment
Economic and Interest Rate Review
 With the ongoing challenges to robustly create jobs and the structural difficulties in
the jobs market that point toward some stagnation, perhaps the biggest reason the
Fed has its foot off the monetary brake is the financial/sovereign debt situation in
the Eurozone. The lower chart displays the yield the market is commanding over
German debt to hold the sovereign debt of the peripheral Eurozone members:
Greece, Portugal, Ireland, Italy, and Spain. The left-hand side of the chart shows
what the Eurozone, operating under a single currency and as a single economic
bloc, was set up to do: all of the debt of the many Eurozone nations was trading at
very similar yield levels. The right-hand side of the chart, however, shows the
shortcoming of a system set up with seventeen nations retaining sovereignty over
fiscal policy but operating under the monetary authority of a single central
bank. While it’s undeniably true that Greece, Portugal and Ireland, in particular,
have large sovereign and banking debt problems, it is our contention that the
problems in the Eurozone will not be solved until this dichotomy of multiple fiscal
policies trying to work in concert with a single monetary authority is fixed, and, until
it is, fear stemming from bad and worsening news coming out of the region will
likely continue to pressure the Fed to keep rates lower for a longer period of time
unless domestic inflation begins to meaningfully rise.
2.50%
Fed Futures
2.00%
1.50%
6/30/2011
9/30/2011
1.00%
12/31/2011
0.50%
2/29/2012
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
0.00%
40.00%
35.00%
30.00%
Germany
25.00%
Portugal
20.00%
Ireland
15.00%
Italy
Greece
10.00%
Spain
5.00%
0.00%
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
 Just as the data appeared to be looking better—more robust third and fourth
quarter 2011 GDP, falling unemployment, etc.—the Federal Reserve’s monetary
policy-making body, the Federal Open Market Committee (FOMC), announced
that it would maintain an accommodative monetary policy stance—it would keep
rates extremely low—until late 2014. Whether this was due to the possibility of the
domestic economy reweakening or the FOMC’s fear of widespread uncertainty
emanating from the Eurozone region, it is not clear, but the Fed appears to be
firmly committed to keeping the front end of the yield curve at low levels for an
extended period. To be sure, a more dovish set of Reserve Bank presidents have
rotated into voting positions on the FOMC, so extended monetary accommodation
is not a surprise. In fact, a poll released by the FOMC after its most recent meeting
showed that, while most members believe that year-end 2014 will see the first
increase in the Committee’s federal funds policy rate, four members don’t believe
it will happen until 2015 and a further two believe it will not occur until 2016.
Chart source: Bloomberg as of February 29, 2012. Past performance is no guarantee of future results .
For institutional use only. Distribution to any other audience is prohibited.
3
Yield Curves
Economic and Interest Rate Review
 The hunt for yield in the money market space continues, as roughly $3 trillion
in assets is chasing paper that matures no longer than in 13 months. Because
of this, the very front-end of the curve is almost completely flat, with fed funds
trading at roughly 11 bp and 1-year Treasury bills trading at roughly 16 bp.
The smaller-than-usual but still meaningful pickup in yield going out to the 2and 3-year parts of curve reflect the fact that this is a perennial underserved
market—too long for the money funds and too short for core bond
managers. Given the outlook for sustained Fed inactivity, this part of the curve
offers solid risk-adjusted yield opportunities for separate account mandates.
 The fact that the Eurozone situation is both a sovereign and a financial
institution issue is directly reflected in what had been a sustained creeping up
of LIBOR, as that short rate contains a banking credit component to it. More
recently, however, positive news out of the Eurozone, possibly of the nature of
nothing more than “kicking the can down the road” and not fundamentally
solving the true problem, has caused LIBOR rates to fall and, along with them,
the TED spread, or the spread between LIBOR and U.S. bill yields. This news
is welcome, as it reflects a diminution of fear in the market, but we fully expect
LIBOR to remain volatile in the days and months ahead.
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
1 mo
3 mo
6 mo
Treasury Curve 11/30/2011
1 yr
2 yr
3 yr
5 yr
Treasury Curve 2/29/2012
Source: U.S. Treasury as of February 29, 2012
1.50%
1.00%
0.50%
0.00%
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
 Between the Eurozone crisis, the prospects for a reweakening of the economy
domestically, two rounds of Federal Reserve quantitative easing that pumped
$2.3 trillion into the markets and the Fed’s “Operation Twist” in the second half
of last year whereby the Fed sold some short-term securities in Treasury
holdings and used the proceeds to buy longer-term Treasury securities, it’s no
surprise that the yield curve is flat and continues to flatten. The very front-end
of the curve, from overnight out to two years, directly reflects the Fed’s
bringing its policy rate to a range of 0 to 25 basis points (bp) in the wake of the
Lehman failure in the fall of 2008, while low and falling rates on the long end
of the curve reflect fear and the impact from the twist operation. All but the 30year part of the term structure of interest rates are at or close to their all-time
lows in terms of yield, and, as stated above, the Fed is looking to maintain
these rates for an extended period.
3-month Libor
TED Spread
Source: Bloomberg as of February 29, 2012
Past performance is no guarantee of future results.
For institutional use only. Distribution to any other audience is prohibited.
4
Short-Term Taxable Yield
Taxable Review
0.80%
0.60%
0.40%
0.20%
CP (A1+/P1)
CDs (A1+/P1)
8 MONTH
7 MONTH
6 MONTH
5 MONTH
4 MONTH
90 DAY
60 DAY
30 DAY
21 DAY
 Another consequence of the liquidity buckets is a premium placed on
Treasuries and discount notes, as both are eligible for the new 2a-7
liquidity buckets inside of specified maturities.
15 DAY
0.00%
7 DAY
 The liquidity requirements for money market funds that went into effect
earlier last year continue to apply pressure on the short end of the curve
as funds meet the 10% daily and 30% weekly minimums.
1.00%
1 DAY
 The short end of the credit curves remains extremely flat and compressed.
Like the Treasury curve, the yields of these securities have flattened even
further during the past three months. All nonfinancial sectors of short-term
high-grade corporate paper continue to trade in a narrow band. The
financial sector, on the other hand, is showing often large-scale
differentiation between certain issuers, reflecting investors’ fears of certain
firms’ exposures to the Eurozone debt problems.
ABCP (A1+/P1)
 There continues to be minimal yield pickup between Treasuries and
discount notes. The spread between the highest-rated commercial paper
(CP) and government agencies also remains very tight.
0.20
0.15
0.10
0.05
0.00
30 day
45 day
60 day
Treasury Bill
90 day
120 day 150 day 180 day 365 day
Agency Discount Note
Chart source: Bloomberg as of February 29, 2012. Past performance is no guarantee of future results.
For institutional use only. Distribution to any other audience is prohibited.
5
Taxable Credit/Structure Spreads
Taxable Review
6.00
4.00
2.00
0.00
BarCap ABS Spread
BarCap 1-3 Corp Spread
60.00
2.00
50.00
1.50
40.00
1.00
30.00
0.50
20.00
USD Swaption
Feb-12
Oct-11
Jun-11
Feb-11
Oct-10
Jun-10
Feb-10
Oct-09
Jun-09
Feb-09
-0.50
Oct-08
0.00
Jun-08
0.00
Feb-08
10.00
Oct-07
 As volatility is a measure of risk in the marketplace, and there is a strong correlation
between falling volatility and residential mortgage-backed securities (MBS) spreads.
The high level of fixed-income volatility stemming from the European situation
makes, in our opinion, the purchase of agency-issued MBS a risk-efficient method
of possibly adding yield to a short-term fixed-income portfolio. Agency-issued MBS
carries with it the creditworthiness of Fannie Mae, Freddie Mac and Ginnie Mae, an
unsurpassed liquidity profile, and additional yield that, in our opinion, outstrips the
uncertainty of the timing of cash flows in the paper.
8.00
Jun-07
 In the asset-backed securities (ABS) space, the story is similar. At the end of
January, spreads of this paper to like-duration Treasury securities stood at 76 bp
and fell to 67 bp by the end of February, a 9 bp or nearly 12% tightening. Longerterm averages, again before the start of spread widening associated with the thenupcoming credit crisis that followed the failure of Lehman in 2008, were roughly 55
bp, again suggesting the potential for further spread tightening. There is relatively
little paper being issued in the short ABS space, so continued strong demand with
little supply should lead to tighter spreads going forward, absent another creditrelated shock to the system.
10.00
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
 Spreads of short corporate paper to like-duration Treasury yields, or the added yield
commanded by the market for compensation for taking on the additional risk, fell
from its end-of-January level of 142 bp to its end-of-February level of 118 bp, a 24
bp tightening, or nearly 17%. Prior to the spread widening that began in mid-2007,
short corporate spreads averaged roughly 55 bp, suggesting that further spread
tightening is possible in this paper. Even if we do not again see those tighter spread
levels, the additional yield in the portfolio from holding this type of investment is
beneficial to the portfolio, as long as individual investments are wisely chosen.
12.00
Feb-07
 The short-term relief in Europe—the staving off of a hard default on Greek
sovereign debt and the European Central Bank’s solving the area’s banks’ possible
funding problems—is being felt in a continued tightening of spreads in non-Treasury
fixed-income products relative to Treasury yields, as investors, seeking yield in the
ultra-low-rate environment, are again flocking to what they, and we, consider to be
possibly safer investments in prudently selected corporate and asset-backed
names.
BarCap US MBS OAS
Chart source: Bloomberg as of February 29, 2012. Past performance is no guarantee of future results.
For institutional use only. Distribution to any other audience is prohibited.
6
Yield Curves
Tax-Exempt Review
 The crossover strategy remains prevalent and is frequently used as
municipal yields remain attractive and will likely remain so until taxable
rates shift higher.
1-week Libor
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
Feb-11
Dec-10
Oct-10
Aug-10
Jun-10
 Although yields of short-term municipal securities remain low, 1-year AAArated municipal notes continue to yield more than 112% of 1-year
Treasury securities.
Apr-10
 January reinvest cash created strong demand from both taxable and taxexempt buyers. The SIFMA index should begin to cheapen as cash
balances are spent down and dealers begin carrying larger VRDN
inventories. SIFMA should settle in around the 0.10% to 0.16% range in
March.
0.40%
0.35%
0.30%
0.25%
0.20%
0.15%
0.10%
0.05%
0.00%
Feb-10
 SIFMA averaged 0.10% for the month of January and February. The
SIFMA Index remains low due to a variety of pressures: lack of new VRDN
supply, stronger concerns over Eurozone credits creating stronger
demand for non-Eurozone credits, continued government stimulus and
continued purchasing of tax-exempt securities by taxable fund managers,
among others.
SIFMA
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
0.00%
1-Year Muni
1-Year Treasury
Chart source: Bloomberg as of February 29, 2012. Past performance is no guarantee of future results.
For institutional use only. Distribution to any other audience is prohibited.
7
Relative Value Yield Curve Comparison
Tax-Exempt Review
 The 1-year municipal yield curve remains flat out to one year with 8 bp of
steepness. Yields have richened in this space as a result of January reinvest cash,
1-month AAA-rated municipals were 0.03% richer at 0.12% and 1-year AAA-rated
municipals were 0.05% richer at 0.20%.
1.00
 Yields on 1-year AAA-rated municipals are 0.07% richer at 0.18% since January.
0.60
 Yields on 2-year AAA-rated municipals are 0.16% richer at 0.26% since January.
 Yields on 3-year AAA-rated municipals are 0.18% richer at 0.42% since January.
0.80
0.40
 Spreads between 1- and 2-year maturities are 9 bp tighter at 8 bp since January.
0.20
 Spreads between 2- and 3-year maturities are 2 bp tighter at 16 bp since January.
0.00
3 month
 Spreads between 1-year AAA-rated municipals and 1-year BBB-rated municipals
tightened 10 bp to 120 bp since January.
6 month
1 year
2 year
AAA GO Curve
3 year
4 year
5 year
AAA Rev Curve
 Issuance has gotten off to a slow start in January, averaging roughly $3.025 billion
per week in January and $5.060 billion per week in February.
1 Year AAA Muni
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
Feb-11
Oct-10
Dec-10
Aug-10
Apr-10
Jun-10
Feb-10
Dec-09
Oct-09
Jun-09
 Keeping an eye on the political landscape - a lot of talk about tax reform by both
parties - some favorable for municipal bonds and taxpayers - one not so favorable.
Aug-09
 Headline pressures continue to be an area of concern for certain municipalities.
This trend is expected to remain in place until the overall economic picture begins
to brighten.
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Apr-09
 The Eurozone remains a concern - financials remain cheap to municipals in the 1to 3-year space, but credit risk and volatility should be considered. Municipals look
attractive to industrial corporate names in the 1- to 3-year space.
Feb-09
 Issuance should start to increase going into March - The first week of March
produced $8.50 billion in new issuance.
1 Year BBB Muni
Chart source: Bloomberg as of February 29, 2012. Past performance is no guarantee of future results.
For institutional use only. Distribution to any other audience is prohibited.
8
Money Market Fund Strategy Review
Prime Funds
Government and Treasury Funds, continued
 Throughout February, we continued to extend the maturities in our prime
portfolios in order to lock in yield in a tightening spread environment. By monthend, most value had been compressed out of the market. For example, by late
February, yields on Canadian and Australian bank investments out through 6month maturities were not compelling. The WAM for Cash Reserves, Money
Market Reserves and Global Dollar were increased in the 3- to 7-day range
while the WAL for these funds were bumped 2 to 6 days longer. Given the
pending Moody’s rating downgrades of European banks and Global Capital
Market Intermediaries, we plan on shortening up the weighted average maturity
of our rated funds during March in order to make the funds more “stress test”
resilient.
 As a result of the influx of Treasury supply, the bill market curve out to 6
months was approximately 5 bp cheaper and 1-year bills 1 bp cheaper. These
were the cheapest levels since early August 2011(debt ceiling).
Government and Treasury Funds
 With a combination of more cash in the markets, Treasury and mortgage
settlements, seasonal increase in bill supply and better market sentiment, the
funds added positions and extended WAM while increasing yield. The WAM of
Government Reserves and Treasury Reserves was extended 8 days and 6
days, while their weighted average lives were pushed out 5 days and 6 days,
respectively. Government Plus was not extended due to larger-than-expected
redemptions throughout the month. The funds continued to ladder 1-month
through 3-month securities, as well as barbell the portfolios by purchasing
Treasury and government agency obligations in the 6-month through 12-month
part of the curve.
 Overnight general collateral rates rose sharply from the end of December 2011
through January 2012 by 4 bp to 17 bp. As the outstanding supply of coupons 1year or less continued to increase and the stock of bill outstandings continued to
decline, coupons continued to trade at a discount to bills, with a gap of
approximately 3 bp to 5 bp. The Treasury also announced bill auction size
increases on the heels of the Fed announcing they will keep rates exceptionally
low at least through late 2014.
Municipal Funds
 During the month of February, the short-term yield curve (MIG1) flattened by 2
bp. The curve had 12 bp of steepness. One-month through 6-month yields
were flat at 12 bp while 1-year yields held at 24 bp. The front end of the curve
remained very well bid as investors remained risk adverse due to the
uncertainty surrounding the Eurozone and potential bank downgrades.
 The SIFMA index averaged 0.14% for the month, up 7 bp from the previous
month’s average of 0.07%. Weekly non-AMT VRDNs traded between 12 bp
and 16 bp. As taxable funds tendered back their VRDNs at the beginning of
the month, SIFMA increased from 8 bp to 17 bp by mid-month. As a result,
daily VRDNs reset as high as 12 bp during this period. The funds’ VRDN
positions continued to average between 70% and 80% of the portfolios.
 Although 3-month LIBOR averaged 50 bp for the month, down 7 bp, taxexempt CP continued to lose its attractiveness from a ratio perspective. One-,
2- and 3-month Tax-Exempt CP averaged 11 bp, 12 bp and 13 bp,
respectively. However, there continued to be strong investor demand as
market participants continued to pay a premium to hold high quality pure
municipal names. As longer-dated CP offered no relative value, we kept our
CP rolls inside of a month as we wait for higher SIMFA rates to be reflected in
the CP scales.
 The Funds’ WAMs averaged in the mid 30’s. Given the current outlook on
interest rates, we would be comfortable with the WAMs in the low/mid 40’s.
However, we continue to monitor what affect, if any, that sterilized QE would
have on the municipal market.
For institutional use only. Distribution to any other audience is prohibited.
9
Separate Account Strategy Review
Taxable Review
Liquidity Focus (BofAML 90-day T-bill Index)
 As the yield curve continues to be almost completely flat out to the 1-year
maturity tenor, we focused on shorter maturities (3- and 6-month paper) in
spread sectors, mainly CP and short-maturity floating rate corporates. For
those accounts that allow its use, short municipal paper offered good
diversification benefits but remains hard to find (outside the VRDN
market), certainly at attractive yield levels (on a tax-adjusted basis) versus
its taxable counterparts. It should be noted, however, that with rates this
low and spreads this tight, it is becoming more and more difficult to find
short paper that provides yields greater than what could be earned in
money market funds, on a fee-adjusted basis. Where longer taxable
exposure was needed, we preferred higher-quality corporate paper, as
short agency debt spreads have strongly compressed and marginal added
yield in lower-quality names is not, in our opinion, adequate compensation
for the added risk. Here, too, tax-exempt paper provides solid
diversification but has richened recently versus the taxable markets.
Enhanced Cash (BofAML 6-month T-bill Index)
 The kink in the shape of the yield curve out past one year in both the
taxable and tax-exempt markets remains notable and provides portfolios
with added yield potential and better roll-down potential. We’ve
concentrated on adding paper here and doing so conservatively, adding
longer paper for taxable-only accounts in the asset-backed sector and in
higher-quality corporates (emphasizing hard-to-find industrial over
financial paper for its lower-volatility characteristics). For portfolios
allowing the crossover use of tax-exempt paper, we’ve seen the relative
cheapness of the municipal paper evaporate over the past several
months, but we continue to opportunistically buy in to that market on
relative weakness and when paper is available. The other side of this
strategy is to “barbell” the portfolios with shorter paper, in a similar fashion
to what is described in the preceding section, to offset this preference for
longer paper.
Ultra Short-Term (Citigroup 1-year Treasury Index linked to the
BofAML 1-year T-bill Index)
 The taxable and tax-exempt portions of the bond markets are retaining
their relatively sharp upward slope past the 1-year part of the term
structure of interest rates out to the 3- and 5-year parts of the curve. We
therefore have focused on taking advantage of these higher yields and
these bonds’ ability to appreciate in price over the passing of time (rolling
down the curve) in light of our outlook for medium-term Fed inactivity. After
pulling in our maximum maturity appetite to the 2- to 2.5-year range,
thinking the Fed may indeed start a tightening cycle sooner rather than
later, recent macroeconomic weakness has allowed the U.S. to again go
out to the 3- to 4-year part of the curve for those accounts that allow us
that flexibility. As is the case in the Enhanced Cash portfolios, we are also
focusing our longer-term purchasing in the Ultra Short-Term strategy in the
high-quality and/or well-structured asset classes — asset-backed
securities, defensive, high-quality corporate names, and, where and when
we can, both taxable and tax-exempt municipal paper. Offsetting these
longer-term buys was short-term paper, consistent with the two strategies
described earlier. In short, we are “barbelling” longer, defensive paper and
shorter paper carrying appropriate levels of risk.
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10
Separate Account Strategy Review
Tax-Exempt Review
Liquidity Focus
 The yield curve for 1-year municipals has continued to flatten. The
“January Effect” has stretched into February as a lack of supply and a
surplus of cash continued to apply pressure on yields. The 30-day
visible new issuance supply has increased and we have seen more
robust new issuance in late February and early March. The increase in
supply should relieve some of the negative pressure on the yield curve,
stabilizing and potentially backing up yields in March. One-year AAArated municipal bonds richened to a 0.18% since January, 0.07% richer.
The spread between A/AAA municipals in the 1-year space tightened 10
bp since January to 0.35%. One-year AAA-rated municipals continue to
be cheap at 112% of 1-year Treasuries. With a flat yield curve and
expectations of rates being on hold until 2014, our strategy remains on
bonds maturing in 15 to 18 months.
Ultra Short Term
 Three-year AAA-rated municipal bonds richened to a 0.42% since
January, 0.18% richer. The spread between A/AAA municipals in the 3year space tightened 12 bp since January to 0.55%. The spread between
2-year and 3-year AAA-rated municipals tightened 2 bp since January to
0.16%. Three-year AAA-rated municipals are currently trading at 100% of
3-year Treasuries. Yields have dropped due to a high level of reinvestment
cash from January maturities and meager new issue supply. Yields should
back up going into March as cash balances are reinvested and the supply
calendar improves. Be patient with reinvesting cash - the lower yields and
tightening of credit spreads that January produced can be quickly
reversed. Corporate bonds and select ABS names may be a suitable
alternative to municipals. With expectations of rates being on hold until
2014, our strategy remains on bonds maturing in 2.5 to 3 years.
Enhanced Cash
 Two-year AAA-rated municipal bonds richened to a 0.33% in January,
0.03% richer. The spread between A/AAA municipals in the 2-year
space tightened 12 bp since January to 0.44%. Two-year AAA-rated
municipals currently trading at 87% of 2-year Treasuries. The 2-year
area of the curve has been very competitive as short-term investors
looked for a little more yield opportunity, outside of Money Market range.
Two-year maturities of newly issued deals have been heavily
oversubscribed. Again, as new issuance increases, demand should
subside and yields bounce back off the January and February lows. With
expectations of rates being on hold until 2014, our strategy remains on
bonds maturing in 1.5 to 2 years.
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11
Glossary
 Non-Farm Payroll Change: Represents total number of paid U.S. workers
of any business, excluding government employees, private household
employees, farmers, and employees of nonprofits that provide assistance
to individuals.
 PPI (Producer Price Index): Measures prices received by producers at the
first commercial sale.
 LIBOR (London Interbank Offered Rate): The rate of interest at which
banks borrow funds, in marketable sizes, from other banks in the London
interbank market.
 TED Spread: The price difference between 3-month futures contracts for
U.S. Treasuries and 3-month contracts for Eurodollars having identical
expiration months. The TED spread can be used as an indicator of credit
risk.
 AAA GO Curve: The curve is populated with U.S. municipal general
obligations with an average rating of AAA from Moody’s and S&P.
 AAA Reverse Curve: The curve is populated with U.S. municipal bonds
backed by general purpose revenues with an average rating of AAA by
Moody’s and S&P.
 SIFMA: Index comprised of high-grade, 7-day tax-exempt variable-rate
demand notes. Index is produced by Municipal Market Data.
For institutional use only. Distribution to any other audience is prohibited.
12
Disclosure
Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a prospectus,
which contains this and other important information about the fund, contact your BofA Global Capital Management representative or
financial advisor or go to www.bofacapital.com.
An investment in money market mutual funds is not a bank deposit and is not insured or guaranteed by Bank of America, N.A. or any of its affiliates
or by the Federal Deposit Insurance Corporation or any other government agency. Although money market mutual funds seek to preserve the value
of your investment at $1.00 per share, it is possible to lose money by investing in money market mutual funds.
Please see the prospectuses for a complete discussion of the risks of investing in money market mutual funds.
The credit quality ratings represent those of Moody’s Investors Service, Inc. (Moody’s) and Standard & Poor’s Corporation (S&P) as of the date of publication and are
subject to change. For information regarding the methodology used to calculate the ratings, please visit Moody’s at www.moodys.com or S&P at
www.standardandpoors.com.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic
developments, and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
Tax-exempt investing offers current tax-exempt income, but it also involves special risks.
Single-state municipal bonds pose additional risks due to limited geographical diversification.
Interest income from certain tax-exempt bonds may be subject to certain state and local taxes and, if applicable, the alternative minimum tax. Any capital gains
distributed are taxable to the investor.
Any guarantee by the U.S. government, its agencies or instrumentalities applies only to the payment of principal and interest on the guaranteed security and
does not guarantee the yield or value of that security.
For institutional use only. Distribution to any other audience is prohibited.
13
Disclosure
Mutual funds and Separate Account Strategies have different fee and expense structures. Limitations and restrictions to investing in Separate Account
Strategies include higher investment limits and net worth requirements. Separate Account Strategies are sold exclusively through financial advisors.
Please review prospectuses or offering documents for specific details.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will
come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of BofA Global Capital
Management, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other BofA Global Capital
Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or
construed as a recommendation of any security or sector.
This information does not constitute investment advice and is issued without regard to specific investment objectives or the financial situation of any
particular recipient.
For institutional use only. Distribution to any other audience is prohibited.
14