Investment Grade Fixed Income Review

Transcription

1 Investment Grade Fixed Income Review February 15, 2018

2 North Carolina Short Term Portfolio (STIF) December 31, 2017 STIF Allocation 1.40% 1.20% Monthly STIF Rate History 1.30% Repurchase Agreements 7.5% Certificate of Deposits 0.1% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 US Treasury 37.9% US Agency 54.5% Portfolio Characteristics Month Ending 12/31/17 Current Net Cash Return 1.30% Effective Duration 1.27 Average Maturity (Yrs) 1.4 Average Credit Rating (Moody s) AAA Average Price Average Coupon 1.21% 2

3 7.0% Short Term Portfolio (STIF) Rate History $21.4 Billion AUM as of 12/31/17 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 1 Yr Treasury NC STIF 6 Mo. T-Bill imoneynet SOURCE: Bloomberg and imoneynet 3

4 10.4% Investment Grade Fixed Income Profile As of December 31, 2017 Allocation Govt Corp Relative Weighting in Core Fixed -1.4% 0.8% IG Core Fixed IG Cash (STIF) Mtge Cash 0.1% 0.5% 89.6% -5.0% -3.0% -1.0% 1.0% 3.0% 5.0% +/- Weighting vs. Benchmark 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Return Summary 5.4% 4.4% 4.9% 2.6% 2.8% 2.5% 2.6% 0.7% 0.9% 6.0% 5.8% 5.2% Qtr 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr IG Fixed Income IG Benchmark * We maintain a short duration position relative to the benchmark 7.6 vs 8.3 As discussed at previous IAC meetings, the costs of maintaining a defensive position are weaker relative returns during a rate decline While our IG Cash outperformed the benchmark, the short duration gap resulted in Core trailing the benchmark 4

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6 10 year and 30 Year UST Yield History 6

7 Yield Curve Movement in

8 High Yield IG Corp US Agency Investment Management Division Fixed Income Credit Markets 10 Year Spread History Peaked at almost 2000bp SOURCE: BofA Merrill Lynch, used with permission. See disclaimer on last page. 8

9 200 Corporate Relative Value and LTIP Allocation by Sector As of 12/31/17 OAS Serv. Tech Retail Insur. Utility HealthCare CapGoods Auto Banks Energy FinServ. Cons.Goods Transpo Telecom Basic Ind. Media RealEst. H165 Leisure % Market Value AA3 A1 A2 Composite Rating A3 BBB1 BBB2 LTIP H165 0 SOURCE: BofA Merrill Lynch, used with permission. See disclaimer on last page. 9

10 Investment Grade Fixed Income Discussion Items Comfort level with short relative duration position? Costs of maintaining position (absolute vs. relative returns) Will inflation prevent further curve flattening by pushing long rates higher? Hidden illiquidity in Investment Grade credit persists IG Cash position could serve as liquidity provider in a dislocation Transfer of non-pension assets from Core Fixed Income completed since the last review with IAC 144a eligibility 10

11 FOMC Projections SOURCE: FEDERAL RESERVE 11

12 Fed Dot Plot SOURCE: Bloomberg 12

13 Modest Rate Increases Expected in the Near Term 5 Yr TIPS Breakeven Rates

14 Fixed Income Return Expectations 1 Year Core Fixed Income Return Simulation (Parallel Shift) as of 12/31/ Return % bp -25 bp no change +25 bp +50 bp +75 bp +100 bp Total Return Income Return Price Return Expectations are for rates to rise modestly in 2018 Inflation concerns growing, but still modest expectations Return expectations over the next five years remain in the 2% to 4% range 14

15 2018 Market Moves & Impact (as of 2/8/18) -1.5 LTIP (Core IG) H167 (Benchmark) 2018 YTD Return

16 Disclaimer BOFA MERRILL LYNCH IS LICENSING THE BOFA MERRILL LYNCH INDICES AS IS, MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE BOFAML INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THEIR USE, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND THE DEPARTMENT OF STATE TREASURER, OR ANY OF ITS PRODUCTS OR SERVICES. 16