Download Short Duration Market Overview

Will 2015 Bring Higher U.S. Interest Rates?
January 2015
For Institutional Use Only
Agenda
1. Global Headwinds
2. U.S. Economic Tailwinds
3. Path To Higher Interest Rates
4. Implication from Money Market Regulatory Reform
5. Cash & Term Portfolio Overview
6. Question & Answers
2
For Institutional Use Only
Global Headwinds
For Institutional Use Only
Global Business Cycle in a Trend of Modest Improvement
4
*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 12/31/2014.
For Institutional Use Only
Recent Global Central Bank Actions
5
Central Bank
Target Rate
Quantitative Easing
Latest News
Federal Reserve
0.00 – 0.25%
Ended QE in October 2014
Removes considerable language with
respect to timeframe to begin
tightening monetary policy
Bank of Canada
0.75%
N/A
Lowered target rate by 25 bps from
1.00% to 0.75% (January 2015)
Bank of England
0.50%
£375 billion
Committee voted to maintain the size
of the Asset Purchase Programme at
£375 billion (January 2015)
Bank of Japan
0.10%
¥80 trillion / year
Increased annual asset purchases
from ¥60 trillion - ¥70 trillion range to
¥80 trillion (October 2014)
Norges Bank (Norway)
1.25%
N/A
Key policy rate lowered by 25 bps
from 1.50 % to 1.25%
(December 2014)
Swiss National Bank
-0.75%
N/A
Ends currency peg with Euro
(January 2015)
European Central Bank
0.05%
€60 billion / month
Announces asset purchase program
that will run through September 2016
(January 2015)
Source: Bloomberg as of 1/15/2015
For Institutional Use Only
U.S. Economic Tailwinds
For Institutional Use Only
Lackluster GDP Growth Despite Historic Fed Policy
Contributions to Real GDP
(% change annualized)
6.0
4.0
2.0
%
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
Net Exports
7
Government
Source: Bureau of Economic Analysis; Last revised on 12/23/2014
For Institutional Use Only
Investment
Consumption
Total
Unemployment Rate Falls From 10% to 5.6%
11
Unemployment Rate
Labor Force Participation Rate
67
10
66
8
7
65
6
5
64
4
3
2
63
1
0
8
Source: Bureau of Labor Statistics, Bloomberg as of 12/31/2014
For Institutional Use Only
62
Participation Rate (%)
Unemployment Rate (%)
9
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
9
Source: Bureau of Labor Statistics, Bloomberg as of 12/31/2014
For Institutional Use Only
6 Month Avg of m/m Chg
Jobless Claims at Pre-Recession Levels
675
Jobless Claims (thousands)
600
525
450
375
300
225
Initial Claims
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Source: Department of Labor, Bloomberg as of 12/26/2014
For Institutional Use Only
Initial Claims, 4-Week Moving Average
Inflation Remains Subdued
US Personal Consumption Expenditure Core Price Index
3.0
2.5
YoY % Change
2.0
1.5
1.0
0.5
0.0
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Source: Bureau of Economic Analysis, Bloomberg as of 11/30/2014
For Institutional Use Only
Path To Higher U.S. Interest Rates
For Institutional Use Only
Path To Higher Interest Rates
Traditional Monetary
Policy
Raise target range for the federal funds rate
Adjust the interest rate paid on excess
reserve balances
Adjust the interest rate paid on reverse repo
program
Quantitative
Easing
 Taper QE – October 2014
Assessment of QE
Cease reinvestment of proceeds from SOMA
holdings
Normalize the size of balance sheet over time
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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
(December 2014)
15
14
Number of Participants
12
3
2
1
1
2014
2015
Jun-2014
14
Sep-2014
Source: Federal Reserve as of 12/17/2014
For Institutional Use Only
2016
Dec-2014
2
Median Target Fed Funds Rate at Year End
Fed Meeting Date
2015
2016
2017
Longer Run
Dec-2014
1.125
2.500
3.625
3.750
Sep-2014
1.375
2.875
3.750
3.750
Jun-2014
1.130
2.500
N/A
3.750
Federal Reserve’s Economic Projections
2.75
Inflation Threshold
PCE YoY (%)
2.50
2.25
2.00
1.75
Inflation Forecast
Actual Inflation
1.50
1.4
1.25
1.00
0.75
Unemployment Rate (%)
8.0
7.5
7.0
6.5
6.0
Actual Unemployment Rate
5.5
5.6
Unemployment Rate Forecast
5.0
4.5
Real GDP YoY ( %)
3.5
3.0
Actual GDP
2.7
GDP Forecast
2.5
2.0
1.5
1.0
Dec-12
15
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Source: Bloomberg and Federal Reserve
Actual Inflation as of 11/30/2014, Actual Unemployment Rate as of 12/31/14, and Actual GDP as of 9/30/14
FOMC Forecast as of 12/17/2014
For Institutional Use Only
Jun-16
Dec-16
Jun-17
Dec-17
Market Expectations Shift, Fed Dots Move Lower
Forward Fed Funds Futures
3.00
FOMC Median (December)
FOMC Median (September)
2.875%
2.50
2.500%
Sep-14 Fed Funds Futures
Fed Funds Rate (%)
Jun-14 Fed Funds Futures
2.00
Dec-14 Fed Funds Futures
1.50
1.350%
1.125%
1.00
0.50
0.00
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Source: Federal Reserve and Bloomberg as of 12/31/14
For Institutional Use Only
Regulatory Reform Update
For Institutional Use Only
Overview of Final SEC Rules on Money Market Mutual Funds
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For Institutional Use Only
Previously Considered Options for NCCMT Cash Portfolio
Primary alternatives
• Convert to a government money market mutual fund
• Continue as a prime money market mutual fund with VNAV and fees/gates
• Launch a government money market mutual fund to complement existing funds
Other alternatives considered
• Continue as prime money market mutual fund, but make investment guidelines more strict to
lessen NAV volatility
• De-register under federal security laws and run LGIP
• Advocate changes to state’s investment guidelines to broaden investment options
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Fidelity Confidential Information
NCCMT Cash Portfolio Recommendation
Convert to a Government Money Market Fund
• Delivers attributes most desired by clients (stable $1 NAV with no fees/gates)
• Least disruptive option for clients and state
• Likely to result in the highest asset retention rate
• Results in a product suite with both a government and credit investment option providing
different risk/return profiles and performance history
Next steps/implementation
• Board approval in April
• Determine level of government approval required
• Communicate to clients/prospects and obtain shareholder approval
• Modify investment guidelines
• Implement investment strategy
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Fidelity Confidential Information
Proposed Implementation Timeline
Q1 ‘15
Discuss
recommendations with
State Treasurer
Board Meeting
Preliminary Proxy
Statement filed with
SEC
Definitive Proxy
Statement filed with
SEC
Mail Date/Record Date
Proxy Solicitation
Shareholder Meeting
Complete conversion
to Government Fund
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Fidelity Confidential Information
April
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Q1 ‘16
Q2 ’16
Cash & Term Portfolio Overview
For Institutional Use Only
Cash Portfolio Remains Well Diversified
NCCMT Cash Portfolio
December 31, 2014
4%
December 31, 2013
2%
9%
6%
18%
North American Banks
17%
Asian/Australian Banks
Eurozone
37%
38%
Nordic/Swiss Banks
UK Banks
11%
Asset Backed CP
Other Corp/VRDN
10%
Government/Repo
Finance Companies
11%
4%
8%
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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 12/31/2014
For Institutional Use Only
6%
4%
5%
12%
Foreign Bank Exposure Geographically Diversified
FOREIGN BANK HOLDINGS: NCCMT CASH PORTFOLIO
60
50
Belgium
Germany
40
% of Funds
Switzerland
Netherlands
Norway
30
Singapore
Canada
Australia
20
UK
Sweden
France
10
Japan
Source: Fidelity Investments as of 12/31/2014
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For Institutional Use Only
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
0
Fund Holdings Primarily Short-Term
NCCMT CASH PORTFOLIO MATURITY SCHEDULE
40
35
% of Net Assets
30
Other Corp/VRDN
25
Finance Companies
Asset Backed CP
20
UK Banks
North American Banks
15
Eurozone
Nordic/Swiss Banks
10
Asian/Australian Banks
Government/Repo
5
Source: Fidelity Investments as of 12/31/2014
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For Institutional Use Only
1-2 Years
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
0
Term Portfolio Remains Well Diversified
NCCMT Term Portfolio
December 31, 2013
December 31, 2014
2% 3%
6%
12%
20%
14%
9%
North American Banks
Asian/Australian Banks
Eurozone
22%
Nordic/Swiss Banks
5%
UK Banks
17%
Asset Backed CP
Other Corp/VRDN
10%
32%
Government/Repo
Finance Companies
30%
26
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 12/31/2014
For Institutional Use Only
18%
First 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 investments
– 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
– Take advantage of rising money market rates as potential Fed tightening gets closer
Outlook
• Fed set to begin to normalize monetary policy in 2015
– Markets looking for Q2/Q3 lift off
– Fed forecast for Fed Funds currently much higher than market expectations
– Money market rates will exhibit more volatility in response to economic data
• Global Central Banks to maintain accommodative monetary policy to encourage economic growth
– Lower interest rates to combat slower growth and lower inflation
– Implement/continue quantitative easing as needed
• Supply dynamics more favorable to money market rates in 2015
– Potential reductions in repo and Agency outstanding should be more than offset by a nearly $375B increase in
Treasury supply, as Treasury FRN issuance continues and longer coupons enter 2a-7 eligibility
– Federal Reserve’s Reverse Repo program should establish a leaky floor on money market rates through year
end
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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
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For Institutional Use Only