Hold on to Your Seat

Transcription

1 Hold on to Your Seat Portfolio Considerations in Changing Markets August 25, 2017 Steven Alexander, 300 S. Orange Ave. (407) CTP, CGFO, CPPT Suite 1170 pfm.com PFM Asset Orlando, FL Management PFM LLC 1

2 The Usual Sir? PFM 2

3 2016 in Review 3.00 Markets rally on Trump s Victory 2.50 China growth worries spilling from 2015 Volatility following Brexit vote Dec '15 Feb '16 Apr '16 Jun '16 Aug '16 Oct '16 Dec '16 Source: Bloomberg. As of 12/31/ Year Treasury Yield PFM 3

4 U.S. Economic & Market Highlights Over the Last 12 Months Economic Highlights Market Highlights Economy Grew $534 billion Jobs Created 2.2 million Consumer Confidence Highest since 2001 Jobless Claims Lowest since 1974 Equities Record high 2-Yr Treasury Yield Highest since 2011 New Vehicles Sold 17.5 million New Homes Sold 561 thousand Consumer Prices Highest since 2014 Housing Prices Record high US Dollar Highest since 2003 Oil Highest since 2015 PFM Source: Bloomberg. As of 12/31/16. 4

5 Who am I? PFM 5

6 Who is the Federal Open Market Committee (FOMC)? Scorecard Doves Hawks Neutral Yellen, Chair Dudley, Vice-Chair Powell Brainard Tarullo Fischer George Mester Bullard Rosengren PFM Source: Financial Times 6

7 Who is the Federal Open Market Committee (FOMC)? 2017 Scorecard 2017 Doves Hawks Neutral Yellen, Chair Dudley, Vice-Chair Powell Brainard Tarullo Fischer Evans Kashkari Harker Kaplan PFM Source: Financial Times 7

8 How many time will the Fed raise interest rates based on the latest Dot Plot? Once Twice Three Times none PFM 8

9 4% December 2016 FOMC Dot Plot Dec-16 FOMC Projections Dec-16 Median 3% Sep-16 Median Fed Fund Futures 2% 1% 0% Longer Term PFM Source: Federal Reserve and Bloomberg; Fed Funds Futures as of 12/31/16. Individual dots represent each Fed 9 official s judgment of the midpoint of the appropriate target range for the federal funds rate.

10 Moving Rates and Market Values Inverse Relationship of Bond Prices & Yields Interest Rates Market Values PFM 10

11 Moving Rates and Market Values Duration & Interest Rate Sensitivity PFM 11

12 It Can Get Complicated Duration & Interest Rate Sensitivity PFM 12

13 12% Lower Yields = Less Income & Smaller Buffer 5-Year U.S. Treasury Yield Total Return Components of BofA Merrill Lynch 1-5 Year U.S. Treasury Index Income Return Price Return 10% 20% 9.9% 8% 6% 15% 10% 6.8% 4.4% 0.8% 5% 4% 2% End of 35-Year Bull Market? 0% -5% 0% -10% PFM Source: Bloomberg, BofA Merrill Lynch Indices, as of 12/31/16. 13

14 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Historical Quarterly Total Returns 1-5 Year Returns 3 Year Treasury Yield -2.0% -3.0% Periodic market value losses are not uncommon as rates move up and down Dec '99 Dec '02 Dec '05 Dec '08 Dec '11 Dec '14 PFM Source: Bloomberg 14

15 Tightening Cycles For the Past 40 Years Starting rates 3% 4.75% 1% 0.25% Dec '86 Dec '88 Dec '90 Dec '92 Dec '94 Dec '96 Dec '98 Dec '00 Dec '02 Dec '04 Dec '06 Dec '08 Dec '10 Dec '12 Dec '14 Dec '16 PFM Source: Bloomberg 15

16 Historical Tightening Cycles 2/94-2/95 6/99-5/00 6/04-6/06 12/15-Present Starting Fed Funds Target Rate 3.00% 4.75% 1.00% 0.25% Ending Fed Funds Target Rate 6.00% 6.50% 5.25%? Change in Target Rate 3.00% 1.75% 4.25%? Duration of Tightening Cycle 12 months 11 months 24 months? Total Number of Hikes Starting Slope of Yield Curve 148 Basis Points 27 Basis Points 190 Basis Points 124 Basis Points Starting Corporate Spread 131* Basis Points 108 Basis Points 90 Basis Points 148 Basis Points * PFM Calculated Spread Source: Bloomberg, Federal Reserve, BofA Merrill Lynch Indices PFM Starting slope is the difference between the 2 year and 10 year Treasury Note. Corporate Spreads Are Investment Grade 16

17 Sector Excess Returns in Periods of Rising Rates June 1999 May 2000 June 2004 June % 1.00% 0.80% 0.80% 0.60% 0.60% 0.40% 0.40% 0.20% 0.20% 0.00% -0.20% Agency Corporate MBS ABS 0.00% Agency Corporate MBS ABS -0.40% Agency Corporate MBS ABS Agency Corporate MBS ABS PFM 17 Source: BofA Merrill Lynch 1-3 Year Indices

18 Basic Portfolio Structures Bullet Barbell Ladder Portfolio Weight 100% 75% 50% 25% Portfolio Weight 100% 75% 50% 25% Portfolio Weight 100% 75% 50% 25% Maturity 6 Months 1 Year 18 Months 2 Year Maturity 6 Months 1 Year 18 Months 2 Year Maturity 6 Months 1 Year 18 Months 2 Year PFM 18

19 Treasury Yield Curve at Beginning and End of 2004 to 2006 Tightening Cycle 6.00% June % 4.00% 3.00% 2.00% 362 basis point increase June % 0.00% 3M 6M 2Y 3Y 5Y 10Y 30Y PFM Source: Bloomberg 19

20 Duration of Portfolios: 1.93 Comparing Performance Tightening Cycle Portfolio Weight Starting Yield Annualized Return Starting Yield 2.68% 1.60% 2.25% Portfolio Weight Annualized Return Yield Difference 2.15% 0.43% Return Difference -0.55% PFM 20

21 Returns by Credit Quality in Tightening Cycles June May 2000 June May 2006 December Current 8% 8% 8% 7% 7% 7% 6% 5% 4% 3% 2% 1% 0% -1% 6% 5% 4% 3% 2% 1% 0% 6% 5% 4% 3% 2% 1% 0% -2% -1% -1% -3% -2% -2% AAA AA A BBB ALL AAA AA A BBB ALL AAA AA A BBB ALL AAA AA A BBB ALL AAA AA A BBB ALL AAA AA A BBB ALL PFM Source: BofA Merrill Lynch Corporate Indices 21

22 Tactical Portfolio Duration Management Average Duration Neutral Expect Lower Rates Expect Higher Rates Upper Limit Target Lower Limit Time PFM 22

23 Which of the following is the most important element of portfolio management? Sector Allocation Issuer/Industry Selection Duration Management Yield Curve Placement PFM 23

24 Interest rates are the Interest headline, rates but not are the the foundation headline, but not the foundation SECTOR ALLOCATION YIELD CURVE/ MATURITY STRUCTURE ISSUER & INDUSTRY SELECTION DURATION Duration PFM 24

25 Fixed Income Opportunities: Relative Market Size 3.0% 1-5 Year Bank of America Merrill Lynch Indices Corp BBB 2.5% Taxable Municipals Corp A-AAA Yield 2.0% ABS (0 to 5 Years) Municipals Supranationals MBS (0 to 5 Years) 1.5% 1.0% Agency U.S. Treasury 0.5% 0.0% Duration (Years) PFM Source: BofA Merrill Lynch Indexes, as of 12/31/16. Size represents relative market value. 25

26 Money Market Reform Takes Hold $2,500 $2,000 Assets in Money Market Funds Prime MMF Govt MMF + $1.0 trillion 1.40% 1.20% 1.00% Money Market Yield Curves CD/CP Average 54 bps $1, % Agencies $1, % Treasuries 0.40% $500 - $0.9 trillion $0 Dec '15 Mar '16 Jun '16 Sep '16 Dec ' % 0.00% Maturity in Months PFM Source: Bloomberg and PFMAM Trading Desk. As of 12/31/16. 26

27 Supranational Yield Advantage (bps) Yield Spread (basis points) Periods Ended June 30, 2016 YTD 1 Year 3 Years 5 Years 1-3 Year Indices U.S. Treasury 1.43% 1.31% 0.98% 0.81% Agency 1.28% 1.27% 1.04% 0.90% Supranational AAA 1.53% 1.46% 1.16% 1.08% Year Agency OAS 1-3 Year AAA Supranational OAS PFM Source: Bloomberg, through 6/30/16. OAS is option-adjusted spread. 27

28 10% Asset-Backed Securities Excess Returns 8% 6% 4% 2% Average 0.77% 0% -2% -4% -6% PFM Source: BofA ML 0-3 Year ABS Index YTD as of November 30,

29 Disclaimers IMPORTANT DISCLOSURES This material is only intended for institutional and/or sophisticated professional investors. It is for informational purposes only and should not be relied upon to make an investment decision, as it was prepared without regard to any specific objectives or financial circumstances. It should not be construed as an offer to purchase/sell any investment. Any investment or strategy referenced may involve significant risks, including but not limited to risk of loss, illiquidity, unavailability within all jurisdictions, and may not be suitable for all investors. To the extent permitted by applicable law, no member of the PFM Group, or any officer, employee or associate accepts any liability whatsoever for any direct or consequential loss arising from any use of this material, including for negligence. This material is not intended for distribution to or use by, any person in a jurisdiction where delivery would be contrary to applicable law or regulation, or it is subject to any contractual restriction. No further distribution is permissible without prior consent. Case study details were provided at your request. You should note the details provided are based on factual information from actual projects that PFMAM completed. It has been provided for general information purposes only and is not intended to provide specific advice or a specific recommendation. The results of individual projects will vary significantly depending upon the size and structure of each fund, permitted investments, prevailing market conditions at the time of the structuring and procurement process, and other events or circumstances beyond the control of PFMAM. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. The views expressed within this material constitute the perspective and judgment of PFM Asset Management LLC at the time of distribution and are subject to change. Any forecast, projection, or prediction of the market, the economy, economic trends, and equity or fixed-income markets are based upon current options as of the date of issue, and are also subject to change. Opinions and data presented are not necessarily indicative of future event or expected performance. Information contained herein is based on data obtained from recognized statistical services issuer reports or communications, or other sources believed to be reliable. No representation is made as to its accuracy or completeness. To ensure compliance with U.S. Treasury Regulations governing tax practice, we inform you that any U.S. federal tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under U.S federal tax law, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. PFM Asset Management LLC cannot provide legal advice, and appropriate professionals should be consulted if such issues are involved. PFM Asset Management LLC is registered with the SEC under the Investment Advisers Act of A copy of our Form ADV, Parts 2A & 2B is available upon request. MODEL PORTFOLIOS Model portfolios utilize the illustrated maturity concentrations as specified by PFMAM to achieve a target modified duration as of the date of the analysis. The portfolios are constructed using securities available on the secondary market at yields as of the date of the analysis. All of the securities used in the model were available during the time period presented. The performance depicted assumes each security was held at a static allocation through the entire period with no impact from cash flow. Coupon payments and maturities are assumed to be retained in the fund. The data shown has not taken into account advisory fees, trading costs, or other fees or charges which may apply. As with all investments, there is the possibility of loss. PFM 29

30 Quiz PFM 30

31 Which of the following will have the biggest market value loss if interest rates increase? A. One Year Bond B. Year Bond PFM 31

32 In a tactical duration strategy, an investment manager will portfolio duration if rapidly rising interest rates are expected A. Increase B. Decrease C. Rotate D. Ignore PFM 32

33 Recent SEC Money Market Fund reform has caused a reduction in which of the following? A. Prime Money Market Fund assets B. Government Money Market Fund Assets C. Both PFM 33

34 A Portfolio strategy is expected to outperform in a market where short-term rates rise and long-term rates stay the same A. Ladder B. Bullet C. Barbell PFM 34

35 Supranational securities carry the full faith and credit of the United States Treasury. True False PFM 35