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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). 21 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