Liquidity is Relevant Again

Transcription

1 Liquidity is Relevant Again April 2019 Not FDIC Insured May Lose Value No Bank Guarantee Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. For institutional use only. l 2019 FMR LLC. All rights reserved.

2 Agenda 1. Macroeconomic Update 2. Fed Expectations and Current Market Conditions 3. Market Based Liquidity Solutions 4. Q&A The information provided herein is general in nature, not individualized, and does not constitute a recommendation. Fidelity is not acting as an advisor to you and does not owe a fiduciary duty to you with respect to the material contained in any verbal or written communication. Fidelity is acting for its own interests. You should consult with your advisor prior to making any investment decisions. 2 For institutional use only.

3 Macroeconomic Update For institutional use only.

4 U.S. and Global Business Cycles Continue to Mature Note: The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. * A growth recession is a significant decline in activity relative to a country s long-term economic potential. We use the growth cycle definition for most developing economies, such as China, because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity, and the deviation from the trend tends to matter most for asset returns. We use the classic definition of recession, involving an outright contraction in economic activity, for developed economies. Source: Fidelity Investments (AART), as of 12/31/18. 4 For institutional use only.

5 Late Cycle Defined by Peaking Growth, Rising Uncertainty For illustrative purposes only. Source: Fidelity Investments (AART) as of 12/31/18. 5 For institutional use only.

6 QE Unwind Is Challenging Global Liquidity Growth Dotted line estimates future central bank assets: Federal Reserve to roll off balance sheet assets by lesser of stated caps or total bonds maturing each month; European Central Bank (ECB) and Bank of England to maintain constant balance sheets in 2019; Bank of Japan to purchase at annualized rate of average purchases over last 12 months; Source: Haver Analytics, Fidelity Investments (AART), as of 11/30/18. 6 For institutional use only.

7 U.S. Economic Policies Likely More Mixed in 2019 LEFT: Source: Fidelity Investments (AART), as of 12/31/18. RIGHT: Alternative scenario, projected by the CBO, assumes various expiring policies will be extended, including recent tax cuts and higher budget caps. Source: Congressional Budget Office, Haver Analytics, Fidelity Investments (AART), as of 4/8/18. 7 For institutional use only.

8 Fed Kept Hiking Despite Yield-Curve Flattening LEFT Source: Bloomberg Financial L.P., Fidelity Investments (AART), as of 12/31/18. RIGHT: Includes instances when the 10 2 year Treasury yield curve initially inverted during Fed tightening cycles. Source: Federal Reserve Board, Bloomberg Financial L.P., Fidelity Investments (AART), as of 12/31/18. 8 For institutional use only.

9 China s Deceleration Challenges Policymakers LEFT: Gray bars represent China growth recessions as defined by AART. Source: China National Bureau of Statistics (official data), Bloomberg Financial L.P., Fidelity Investments (AART), as of 11/30/18. RIGHT: Source: State Administration of Foreign Exchange, Bank for International Settlements, Organization for Economic Cooperation & Development, Haver Analytics, Fidelity Investments (AART), as of 9/30/18. 9 For institutional use only.

10 U.S.-China: Strategic Competition Intertwined with Trade RIGHT: The size of the circles represents total trade. The thickness of lines represents the volume of trade flows. The size of the circle and proximity to other countries represents importance and interconnectedness. Gray circles represent other countries. Source for both: International Monetary Fund, Haver Analytics, Fidelity Investments (AART), as of 12/31/ For institutional use only.

11 Fed Expectations and Current Market Conditions For institutional use only.

12 % Market Rate Hike Expectations Have Decreased Substantially Fed Funds Target, Market and FOMC Forecasts Actual Fund Rate Fed Fund Ceiling Fed Funds Futures (9/28/18) 3.5 Fed Funds Futures (2/28/19) FOMC Dots Median (12/19/18) Long-Run FOMC Median Source: Federal Reserve and Bloomberg as of 2/28/2019. For institutional use only.

13 Yield (%) Rates Are Difficult to Predict PROFESSIONAL FORECASTS VS. ACTUAL 10-YEAR YIELD ( ) Black Line = Actual Colored Lines = Rolling 5-Quarter Median Forecasts of 10-Year Yields /00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/18 12/19 13 Source: Federal Reserve Bank of Philadelphia Quarterly Survey of Professional Forecasters, Federal Reserve Bank of St. Louis Economic Data (FRED), and FMR Co., as of 9/30/2018. The black line represents the actual rolling 10-year note yield while the colored lines represent forecasted numbers. Each colored line represents rolling 5-quarter forecasts by the professional forecasters (median). For institutional use only.

14 Basis Points Inverted Curves Have Been a Leading Predictor of Recessions Recessions 10-Year Treasury Yield minus 3-Month Treasury Yield Source: The National Bureau of Economic Research, Bloomberg as of 2/28/2019. Past performance is no guarantee of future results. For institutional use only.

15 Real GDP YoY ( %) Unemployment Rate (%) PCE YoY (%) Federal Reserve s Economic Projections Inflation Forecast Inflation Unemployment Rate 4.0 Unemployment Rate Forecast GDP GDP Forecast Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Source: Bloomberg and Federal Reserve. Inflation as of 12/31/2018, Unemployment Rate as of 1/31/2019, and GDP as of 12/31/2018. FOMC Forecast based on the central tendency (excludes the three highest and three lowest projections for each variable in each year) as of 12/19/ For institutional use only.

16 5y Real Yield (%) Fed Funds Target Rate (%) Gradual Tightening 6 Conventional Tightening 5.25% Conventional Easing Unconventional Easing Unconventional Tightening Conventional Tightening % % 0.125% QE1 Jan 09 QE2 Nov 10 Considerable Time Mar 14 Fed Hikes 25 bps Dec 15 Fed Hikes 25 bps Dec 16 Fed Hikes 25 bps Jun 17 Fed Hikes 25 bps Mar 18 Jun 18 Sep 18 Dec Mid-2013 Aug 11 QE3 Sep 12 Taper Talk May 13 Taper Dec 13 Meeting by Meeting Mar 15 Fed Hikes 25 bps Mar 17 Fed Hikes 25 bps Dec 17 Source: Federal Reserve and Bloomberg as of 2/28/ For institutional use only.

17 ($ in Trillions) Federal Reserve Balance Sheet and Rate Expectations FEDERAL RESERVE BALANCE SHEET 5 Actual Data Most Recent Data = 2/28/19 Forecasts 4 Other Assets Lending Facilities Agencies+ MBS Treasuries Federal Assets 0-1 Currency in Circulation -2-3 Other Liabilities Federal Liabilities Source: Federal Reserve and Fidelity, as of 2/28/2019. For institutional use only.

18 Billions Bank Reserves Have Gradually Declined Since the End of QE $3,500 US Reserve Balances with Federal Reserve Banks $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Source: Federal Reserve and Bloomberg as of 2/27/ For institutional use only.

19 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Billions Treasury Bills Outstanding $2,400 Bills Outstanding (Left Axis) Bill % of Treasury Debt (Right Axis) 40% $2,200 35% $2,000 $1,800 $1,600 $1,400 $1,200 30% 25% 20% 15% $1,000 10% $800 5% Source: J.P. Morgan Markets as of 1/31/ For institutional use only.

20 $Billions Yield (%) Increased Rates & Credit Spreads Drive CP Yield s Higher Commercial Paper Outstanding Commercial Paper 90-Day Yields 1,600 Non Financial CP Financial CP Asset Backed CP 3.5 AA Non Financial CP AA Financial CP A2/P2 Non Financial CP AA Asset Backed CP 1, , , Source: Federal Reserve & Bloomberg Finance L.P., as of 2/28/2019. For institutional use only.

21 Basis Points Spreads Widen with Market Volatility 70 3-Month US LIBOR OIS Spread /28/2011 2/29/2012 2/28/2013 2/28/2014 2/28/2015 2/29/2016 2/28/2017 2/28/2018 2/28/2019 Note: Spread represents the difference between 3-Month Libor and the 3-Month USD Overnight Indexed Swap. Overnight Indexed Swap (OIS) is a fixed/float interest rate swap where the floating leg is computed using a published overnight index rate. The index rate is typically the rate for overnight unsecured lending between banks, for example the Federal funds rate for US dollars, Eonia for Euros or Sonia for Sterling. Source: Bloomberg as of 2/28/ For institutional use only.

22 Secured Overnight Financing Rate The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, and was first published by the Fed on April 3, SOFR is intended to replace Libor as the standard interest rate benchmark. SOFR is calculated as a volume-weighted median of repo transaction data from the Bank of New York and Depository Trust & Clearing Corporation (DTCC) accounting for approximately $800B-$850B of average daily transaction volume. Alternative Reference Rates Committee (ARRC) Paced Transition Plan 2H 2018 End of 2018 Q Q Q End of 2021 Infrastructure for futures and/or OIS trading in SOFR is put in place by ARRC members. Trading begins in futures and/or bilateral, uncleared, OIS that reference SOFR. Trading begins in cleared OIS that reference SOFR in the current (EFFR) PAI and discounting environment. CCPs begin accepting new or modified swap contracts (swaps paying floating legs benchmarked to EFFR, LIBOR, or SOFR) that pay SOFR as PAI and are discounted with a SOFR curve. In this stage, market participants are allowed a choice at the time of execution of each trade between clearing contracts that calculate PAI and discounting using either EFFR or SOFR, with both types of contracts cleared within the same clearing guarantee fund. CCPs would gradually lengthen the maturity of contracts accepted for clearing in the new SOFR PAI/discounting environment to ensure that liquidity was adequate to support the new discount curve. CCPs no longer accept new swap contracts for clearing with EFFR as PAI and discounting except for the purpose of closing out or reducing outstanding risk in legacy contracts that use EFFR as PAI and discount rate. Existing contracts using EFFR as PAI and discount rate and new contracts using SOFR as PAI and discount rate continue to exist in the same pool. Existing contracts roll off over time as they mature or are closed out. Methods for accelerating this close out, and the potential to pre-announce the closure of the CCPs EFFR-based PAI and discount rate capability, may play a part. Creation of a term reference rate based on SOFR derivatives. Source: Federal Reserve Bank of New York. 22 For institutional use only.

23 Market Based Liquidity Solutions For institutional use only.

24 Key Considerations for Cash Managers Regulatory reforms of 2010 and 2016 have greatly enhanced the safety and liquidity of money market mutual funds (MMFs). Cash has re-emerged as a viable short-term investment solution following seven years of zero interest rate policy (12/ /2015). Higher interest rates have driven industry average MMF yields equal to or greater than bank deposit/sweep accounts. Money market fund yields are highly correlated with the Federal Funds Target Rate. Cash as an asset class has returned to prominence given the gradual increase in monetary policy and heightened volatility in equity and fixed income. Optimizing liquidity requires cash segmentation.. 24 For institutional use only.

25 Segmenting Liquidity is Critical Objectives drive investment strategy Different Objectives Different Investment Priorities Operating Cash Short-Term Strategic Liquidity Long-Term Strategic Liquidity SAFETY LIQUIDITY RETURN SAFETY LIQUIDITY RETURN SAFETY LIQUIDITY RETURN Balancing safety, liquidity and returns For illustrative purposes only. 25 For institutional use only.

26 Assets (Billions) Significant Growth Opportunities for Money Market Funds $10,000 $9,000 Bank MMDA AUM $9.3T $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 Money Market Fund AUM $3.0T $1,000 $0 26 Source: imoneynet as of 1/31/2019, Federal Reserve (H.6) as of 1/31/2019. For institutional use only.

27 Yield (%) Market Based Investments Outpace Administered Deposits 2.50 Federal Reserve Target Rate (Mid Point of Range) Institutional Government MMF 7-Day Yield MMDA >=$100K Yield Institutional Prime MMF 7-Day Yield Retail Government MMF 7-Day Yield Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Source: Bloomberg, imoneynet, Federal Reserve Bank of St. Louis and FDIC as of 1/31/ For institutional use only.

28 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 1-Month Cumulative Return (%) S&P 500 Index Value Increased Market Volatility May Warrant Increased Cash Holdings VIX S&P 500 Index 3,000 2,800 2,600 2,400 2,200 2,000 1, VIX Index Value S&P 500 BBgBarc U.S. Agg Bond Source: Top Chart: Bloomberg as of 2/22/2019. Bottom Chart: Fidelity Investments as of 2/28/ For institutional use only.

29 Ultrashort Bond Funds Experience Significant AUM Growth Morningstar Ultrashort Bond Category Assets & Yield Total Net Assets ($B) (Left Axis) Average SEC Yield (Right Axis) $180.0 $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $ % 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% $ % Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Source: Morningstar Direct as of 1/31/ For institutional use only.

30 Potential Investment Strategies Investment Strategy 30-Day Net Yield (%) WAM/Duration (Months) WAL/Average Effective Maturity (Months) imoneynet Government Institutional Category Average 2.11% imoneynet Prime Institutional Category Average 2.35% Morningstar Ultrashort Bond Fund Category Average 2.61% Portfolio Mix 30-Day Net Yield (%) WAM/Duration (Months) WAL/Average Effective Maturity (Months) 50% Government Money Market 25% Prime Money Market 25% Ultrashort Bond Fund 33% Government Money Market 33% Prime Money Market 34% Ultrashort Bond Fund 25% Government Money Market 25% Prime Money Market 50% Ultrashort Bond Fund 2.30% % % For illustrative purposes only. Source: imoneynet and Morningstar Direct as of 2/28/ For institutional use only. Past performance is no guarantee of future results.

31 Q&A For institutional use only.

32 Important Information Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. 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. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. Foreign securities can be more volatile than U.S. markets due to increased risks of adverse issuer, political, regulatory, market or economic developments. Changes in government regulation, interest rates and economic downturns can have a significant effect on issuers in the financial services sector, including the price of their securities or their ability to meet their payment obligations. Prepayment of principal prior to a security's maturity can cause greater price volatility if interest rates change. Fundscan invest in securities that may have a leveraging effect (such as derivatives and forward-settling securities) that may increase market exposure, magnify investment risks, and cause losses to be realized more quickly. Ultrashort Bond Funds are not money market funds and will have a fluctuating NAV. Government/Treasury Money Market Funds You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund s sponsor, have no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. Fidelity s government and U.S. Treasury money market funds will not impose a fee upon the sale of your shares, nor temporarily suspend your ability to sell shares if the fund's weekly liquid assets fall below 30% of its total assets because of market conditions or other factors. Institutional Prime Money Market Fund You could lose money by investing in a money market fund. Because the share price of the fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund s liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund s sponsor, have no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. 32 For institutional use only.

33 Important Information Retail Prime and/or Municipal Money Market Funds You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund s liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund s sponsor, have no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Interest rate increases can cause the price of a money market security to decrease. A decline in the credit quality of an issuer or a provider of credit support or a maturity-shortening structure for a security can cause the price of a money market security to decrease. Before investing, consider the funds and/or accounts investment objectives, risks, charges, and expenses. Contact Fidelity or visit institutional.fidelity.com for a prospectus or, if available, a summary prospectus containing this information, if applicable. Read it carefully. The third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or an affiliated company. Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FIAM-BD For institutional use only. Not FDIC insured. May lose value. No bank guarantee.