The Path To Higher Interest Rates
description
Transcript of The Path To Higher Interest Rates
The Path To Higher Interest Rates
July 2014
For Institutional Use Only
2
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
Agenda
For Institutional Use Only
Assessing Risk: Current Market Conditions
For Institutional Use Only
Coordinated Global Monetary Policy
4Source: Bloomberg as of 6/30/14
Jun-
08
Dec-0
8
Jun-
09
Dec-0
9
Jun-
10
Dec-1
0
Jun-
11
Dec-1
1
Jun-
12
Dec-1
2
Jun-
13
Dec-1
3
Jun-
140.0
1.0
2.0
3.0
4.0
5.0
6.0
Federal Reserve European Central Bank Bank of England Bank of Japan
%
For Institutional Use Only
0%
5%
10%
15%
20%
25%
30%Federal Reserve Assets as a % of GDP
Federal Reserve Bank
Central Banks Resort to Non-Traditional Policy
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 Only5
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%Key Central Bank Assets as a % of GDP
European Central Bank Bank of England Bank of Japan
QE1 QE2 QE3
Global Debt to GDP Trends
For Institutional Use Only
2008 2009 2010 2011 2012 20130
50
100
150
200
250Debt as a % of GDP
Eurozone China U.S. Japan
%
6
Source: www.tradingeconomics.com
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
Dec-0
8
May
-09
Oct-09
Mar
-10
Aug-1
0
Jan-
11
Jun-
11
Nov-1
1
Apr-1
2
Sep-1
2
Feb-1
3
Jul-1
3
Dec-1
3
May
-14
-$100
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400Bond & Equity Fund Cumulative Flows
Equity Bond
Bill
ion
Source: Strategic Insight Simfund as of 5/31/14Note: Flows include both mutual funds and ETFs
8 For Institutional Use Only
QE Has Driven Bond Yields and Valuations
Source: Bloomberg as of 6/30/149
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
Jun-
140.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5 10-Year Government Bond Yields
US UK Germany Japan
Yie
ld (
%)
For Institutional Use Only
Quest For Yield Has Driven Corporate Spreads Lower
10Source: Barclays as of 6/30/14
Jun-
07
Dec-0
7
Jun-
08
Dec-0
8
Jun-
09
Dec-0
9
Jun-
10
Dec-1
0
Jun-
11
Dec-1
1
Jun-
12
Dec-1
2
Jun-
13
Dec-1
3
Jun-
140
100
200
300
400
500
600
700
800 Barclays Credit Index Sub-Sector OAS
Industrials Utilities Financials
Op
tio
n A
dju
ste
d S
pre
ad
(b
ps
)
For Institutional Use Only
QE Has Led To Higher Equity Valuation
Source: Bloomberg as of 6/30/14The performance data featured represents past performance, which is no guarantee of future results.You can not invest in an index.
11
Jun-
08
Dec-0
8
Jun-
09
Dec-0
9
Jun-
10
Dec-1
0
Jun-
11
Dec-1
1
Jun-
12
Dec-1
2
Jun-
13
Dec-1
3
Jun-
1450
65
80
95
110
125
140
155
170
S&P 500 FTSE 100 DAX Nikkei 225
Ind
ex
Va
lue
(In
de
xe
d t
o 1
00
at
6/3
0/0
8)
For Institutional Use Only
QE Taper Creates Emerging Market Volatility
12
Jun-
13
Jul-1
3
Aug-1
3
Sep-1
3
Oct-13
Nov-1
3
Dec-1
3
Jan-
14
Mar
-14
Apr-1
4
May
-14
Jun-
14800
850
900
950
1000
1050
1100
MSCI Emerging Markets Index Barclays Emerging Markets USD Aggregate Index
Ind
ex
Va
lue
Source: Barclays and Bloomberg as of 6/30/14The performance data featured represents past performance, which is no guarantee of future results.You can not invest in an index.
For Institutional Use Only
19621967
19721977
19821987
19921997
20022007
20122017
20222027
20322037
20422047
20522057
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
0
2
4
6
8
10
12
14
16
US Borrowers/Savers12 Month Rolling Average 10-Year U.S. Treasury Yield
Ra
tio
Yie
ld (%
)Demographics are an Important Driver of Interest Rates
13
Source: Bloomberg and Haver as of 6/30/14
For Institutional Use Only
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
Source: Bloomberg and Federal ReserveFOMC Forecast as of 06/18/2014
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
6.1
Un
em
plo
ym
en
t R
ate
(%
)
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
1.5
PC
E Y
oY
(%
)
Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-161.0
1.5
2.0
2.5
3.0
3.5
4.0
1.5Re
al G
DP
Yo
Y (
%)
Actual Inflation
Inflation Forecast
Unemployment Rate ForecastActual Unemployment Rate
Actual GDPGDP Forecast
Inflation Threshold
16 For Institutional Use Only
U.S. Inflation Risks Remain Subdued
17
Aug
-07
Feb
-08
Aug
-08
Feb
-09
Aug
-09
Feb
-10
Aug
-10
Feb
-11
Aug
-11
Feb
-12
Aug
-12
Feb
-13
Aug
-13
Feb
-14
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
3500.0
4000.0
1.50x
1.55x
1.60x
1.65x
1.70x
1.75x
1.80x
1.85x
1.90x
1.95x
2.00x
Monetary Base Money Velocity
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.
U.S. Monetary Base and Velocity Key Drivers of Inflation
$ Trillions Money Velocity
For Institutional Use Only
Jun-
03
Nov-0
3
Apr-0
4
Sep-0
4
Feb-0
5
Jul-0
5
Dec-0
5
May
-06
Oct-06
Mar
-07
Aug-0
7
Jan-
08
Jun-
08
Nov-0
8
Apr-0
9
Sep-0
9
Feb-1
0
Jul-1
0
Dec-1
0
May
-11
Oct-11
Mar
-12
Aug-1
2
Jan-
13
Jun-
13
Nov-1
3
Apr-1
4225
300
375
450
525
600
675
Initial Claims Initial Claims, 4-Week Moving Average
Jo
ble
ss
Cla
ims
(th
ou
sa
nd
s)
Jobless Claims Heading to Pre-Recession Levels
Source: Department of Labor, Bloomberg as of 6/27/1418 For Institutional Use Only
U.S. Labor Participation Rates Continues Downward Trend
Jun-
05
Dec-0
5
Jun-
06
Dec-0
6
Jun-
07
Dec-0
7
Jun-
08
Dec-0
8
Jun-
09
Dec-0
9
Jun-
10
Dec-1
0
Jun-
11
Dec-1
1
Jun-
12
Dec-1
2
Jun-
13
Dec-1
3
Jun-
1462
63
64
65
66
67
0
1
2
3
4
5
6
7
8
9
10
11Labor Force Participation Rate Unemployment Rate
Par
tici
pat
ion
Rat
e (%
)
Un
emp
loym
ent
Rat
e (%
)
Source: Bureau of Labor Statistics, Bloomberg as of 6/30/1419 For Institutional Use Only
Employment Creation Positive, But Not Impressive
Source: Bureau of Labor Statistics, Bloomberg as of 6/30/14
Jun-
03
Dec-0
3
Jun-
04
Dec-0
4
Jun-
05
Dec-0
5
Jun-
06
Dec-0
6
Jun-
07
Dec-0
7
Jun-
08
Dec-0
8
Jun-
09
Dec-0
9
Jun-
10
Dec-1
0
Jun-
11
Dec-1
1
Jun-
12
Dec-1
2
Jun-
13
Dec-1
3
Jun-
14-1000
-800
-600
-400
-200
0
200
400
600
m/m Change in Non-Farm Payrolls 6 Month Avg of m/m Chg
Th
ou
sa
nd
s o
f E
mp
loy
ee
s
20 For Institutional Use Only
80
85
90
95
100
105
110
115
-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
Post Recession U.S. Employment Recovery’s
21
Employment: Pre and Post Recession
Source: NBER, BLS/Haver as of 4/30/14. Data represents Civilian Employment (SA, Thous).
Most Recent Recession
Em
ploy
men
t Lev
el In
dexe
d to
100
at S
tart
of
Rec
essi
on
For Institutional Use Only
Lackluster GDP Growth Despite Historic Fed Policy
Mar
-07
Jun-
07
Sep-0
7
Dec-0
7
Mar
-08
Jun-
08
Sep-0
8
Dec-0
8
Mar
-09
Jun-
09
Sep-0
9
Dec-0
9
Mar
-10
Jun-
10
Sep-1
0
Dec-1
0
Mar
-11
Jun-
11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Sep-1
2
Dec-1
2
Mar
-13
Jun-
13
Sep-1
3
Dec-1
3
Mar
-14
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Net Exports Government Investment Consumption Total
%
Contributions to Real GDP(% change annualized)
Source: Bureau of Economic Analysis as of 6/25/1422 For Institutional Use Only
Potential Headwinds for GDP
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.$
May
-09
Nov-0
9
May
-10
Nov-1
0
May
-11
Nov-1
1
May
-12
Nov-1
2
May
-13
Nov-1
3
May
-14
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
US Personal Consumption ExpendituresUS Personal Income
% C
ha
ng
e Y
oY
23
Jun-
09
Dec-0
9
Jun-
10
Dec-1
0
Jun-
11
Dec-1
1
Jun-
12
Dec-1
2
Jun-
13
Dec-1
3
Jun-
1450
55
60
65
70
75
80
85
90
U. of Michigan Survey of Consumer Confidence Sentiment
Ind
ex
Le
ve
l
For Institutional Use Only
Higher Mortgage Rates Could Dampen Recovery
Source: Bankrate.com, Mortgage Bankers Association, Bloomberg as of 6/27/14Note: 30-year mortgage rate represents the overnight national average.
3.0
3.5
4.0
4.5
5.0
5.5
6.0
0
1,000
2,000
3,000
4,000
5,000
6,000
30-Year Fixed Mortgage Rate vs. Refinance Index
30
-Ye
ar
Fix
ed
Ra
te (
%)
Re
fin
an
ce
Ind
ex
Va
lue
24For Institutional Use Only
Timeline To Higher U.S. Interest Rates
For Institutional Use Only
Consensus Builds for a 2015 Rate Hike
26Source: Federal Reserve as of 06/18/2014
Federal Reserve Board Rate Expectations
Appropriate Pace of Policy Firming (June 2014)
Fed Meeting Date 2015 2016 Longer Run
Jun-2014 1.13 2.50 3.75
Mar-2014 1.00 2.25 4.00
Median Target Fed Funds Rate at Year End
2014 2015 2016
2
12
3
1
13
2
1
12
3
Appropriate Timing of Policy Firming
Dec-2013 Mar-2014 Jun-2014
Nu
mb
er o
f P
arti
cip
ants
For Institutional Use Only
Market Expectations for First Rate Hike
27
Aug-1
3
Oct
-13
Dec-1
3
Feb-1
4
Apr-1
4
Jun-
14
Aug-1
4
Oct
-14
Dec-1
4
Feb-1
5
Apr-1
5
Jun-
15
Aug-1
5
Oct
-15
Dec-1
5
Feb-1
6
Apr-1
60.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Forward Fed Funds Futures
%
Source: Bloomberg as of 6/30/14
Sep-13
May-13
For Institutional Use Only
Jun-14
Regulatory Reform Update
For Institutional Use Only
29 For Institutional Use Only
Rule Proposal Expected
Q3/Q4 2014
Proposed Effective Date for Alternative
2Q3/Q4 2015
Proposed Effective Date for Alternative
1 2016 Q3/Q4
Jan 2013
Obama names Mary Jo White as SEC Chairman
Feb 2013
FSOC proposal comment deadline(extended from Jan 18)
Feb/Mar 2013
Mary Jo White confirmed as SEC Chairman
Aug 2013
Stein and Piwowar replace Walters and Paredes at SEC
Sept 2013
SEC comment deadline
Apr 2013
SEC rule proposal issued
2013 Key Events
Future Timeline
Money Market Fund Reform Timeline
Source: iMoneyNet and Fidelity as of 9/30/13
Cash & Term Portfolio Overview
For Institutional Use Only
Portfolio diversification is presented to illustrate examples of the securities that each fundhas 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
31
NCCMT Cash Portfolio
June 30, 2014 June 30, 2013
10%
14%
15%
8%7%
5%
7%
29%
4%
North American Banks
Asian/Australian Banks
Eurozone
Nordic/Swiss Banks
UK Banks
Asset Backed CP
Other Corp/VRDN
Government/Repo
Finance Companies
9%
18%
3%
13%
2%
14%
9%
27%
8%
Focus on High Quality Issuers
For Institutional Use Only
32
Foreign Bank Exposure Geographically Diversified
Source: Fidelity Investments as of 6/30/2014
FOREIGN BANK HOLDINGS: NCCMT CASH PORTFOLIO
Jul-1
3
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
Feb
-14
Mar
-14
Apr
-14
May
-14
Jun-
14
0
10
20
30
40
50
60
Netherlands
Norway
Switzerland
Singapore
Germany
Canada
Japan
UK
Australia
Sweden
France
% o
f F
un
ds
For Institutional Use Only
33
Fund Holdings Primarily Short-Term
Source: Fidelity Investments as of 6/30/2014
NCCMT CASH PORTFOLIO MATURITY SCHEDULEJu
l-14
Aug
-14
Sep
-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
1-2
Yea
rs
0
5
10
15
20
25
30
35
Finance Companies
Asset Backed CP
UK Banks
Other Corp/VRDN
Nordic/Swiss Banks
North American Banks
Asian/Australian Banks
Eurozone
Government/Repo
% o
f N
et A
sset
s
For Institutional Use Only
Portfolio diversification is presented to illustrate examples of the securities that each fundhas 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
34
NCCMT Term Portfolio
June 30, 2014 June 30, 2013
11%
12%
33%
19%
14%
10%1%
North American Banks
Asian/Australian Banks
Eurozone
Nordic/Swiss Banks
UK Banks
Asset Backed CP
Other Corp/VRDN
Government/Repo
9%
20%
24%
24%
12%
6%4%1%
Focus on High Quality Issuers
For Institutional Use Only
Third Quarter Investment Strategy and OutlookInvestment 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
36
Important Information
Not FDIC insured. May lose value. No bank guarantee.
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.
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693367.1.0
For Institutional Use Only