Virginia GFOA. May 4, Reid Andrews Government Treasury Management. Vanessa Hubbard Fixed Income Market & Portfolio Strategy

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1 Virginia GFOA May 4, 2016 Reid Andrews Government Treasury Management Vanessa Hubbard Fixed Income Market & Portfolio Strategy WFS and its investment representatives do not act as Municipal Advisors and only provide investment advice or recommendations with respect to bond proceeds as permitted by available exemptions

2 Table of Contents I. Overview of Cash Forecasting and Positioning II. III. IV. Monetary Policy, Rates Outlook Positioning on the Curve Cross Sector Relative Value V. Tactical Liquidity 2

3 Short-Term Overview of Cash Forecasting and Positioning 25-Apr 4-Mar Y FWD 1Y FWD 1.00 Spot Mo 2 Mo 3 Mo 6 Mo 9 Mo 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 9 Yr 10 Yr Source: Federal Reserve Bank and Wells Fargo Securities, LLC 3

4 Short-Term Overview of Cash Forecasting and Positioning Wells Fargo & non- WFB accounts (domestic and international) 1-click print and export File upload of anticipated transactions Transaction matching Self-reporting also available 4

5 Short-Term Overview of Cash Forecasting and Positioning Daily balances 57 weeks into future Forecast created daily by use of rules View by day, week, month, quarter or year Save time and increases accuracy 1-click print and export of data Easy set-up 5

6 Monetary Policy, Rates Outlook

7 Rate (%) How much will Rates Rise? According to Policymakers The expected pace of firming has changed. The 2016 median appropriate Fed funds rate decreased to 0.88 percent from 1.38 percent and the 2017 median appropriate rate is now projected at 1.02 percent. Fed Fund futures are pricing at the lower end of 2016 and 2017 forecasts. September December Dot Plot Comparison December Projection March Projection Fed Funds Futures Longer Run Source: Federal Reserve Board and Wells Fargo Securities, LLC 7

8 Economists When will the Fed Raise Rates next? Depends on Who You Ask Bloomberg Survey Estimates of Expected Fed IOER Apr-16 Jun The consensus economist estimates show that many are calling for the FOMC to remain on hold in April, waiting until June to raise interest rates once again Source: Federal Reserve Bank and Wells Fargo Securities, LLC 8

9 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Yield (%) When will the Fed raise rates again? Markets see rates remaining low in the near-term Short Term Rates Remain Low 1.6 3M Tbill 3M LIBOR 1.4 Short-term cash markets have responded to the first rate hike, though t-bill rates remain at either the lower end or below the Fed s target range This is likely to remain the case for the foreseeable future as demand for short-term government assets is at an alltime (non-crisis) high Fed funds target range Source: ICE, Bloomberg an d Wells Fargo Securities, LLC 9

10 When will the Fed raise rates? Markets continue to trade Cash and Futures-Implied Yields Recent global economic data has caused Eurodollar and Fed funds futures contracts to oscillate, though they are currently at or slightly above trend for Dec '16 Futures Dec '17 Futures 3M LIBOR Dec '16 FF Futures Dec '17 FF Futures Fed Effective Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 0.0 Source: CBOT, ICE, Bloomberg and Wells Fargo Securities, LLC 10

11 Positioning on the Curve when rates rise?

12 Cost of Waiting Time in Cash Break-even Analysis, 3-year Agency at 1.090% Remaining Time Income Forgone Break-even Rate Over Remaining Term 6 months 2.5 years $45, % 12 months 2 years $91, % 18 months 1.5 years $136, % Portfolio price volatility is a reality of fixed income investing, but there is also a cost to overweighting cash. Time in Cash Break-even Analysis, 5-year investment at 1.455% Remaining Time Income Forgone Break-even Rate Over Remaining Term 6 months 4.5 years $63, % 12 months 4 years $127, % 18 months 3.5 years $191, % 24 months 3 years $255, % Source: Wells Fargo Securities, LLC Amount invested: $10M Cash investment rate: 0.18% 12

13 Yield (%) 1M 6M 2Y 4Y 6Y 8Y 10Y 12Y 14Y 16Y 18Y 20Y Rates Treasury Curve /20/2015 4/20/ Short-term rates have risen recently, however longer-term Treasury rates remain unchanged, year-over-year Source: Federal Reserve Bank and Wells Fargo Securities, LLC 13

14 Rates Spot vs. Forward Curve 25-Apr 4-Mar Y FWD The forward curve has shifted higher versus a month ago, signaling that the market anticipates rates to begin to elevate Y FWD Spot 1 Mo 2 Mo 3 Mo 6 Mo 9 Mo 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 7 Yr 9 Yr 10 Yr Source: Federal Reserve Bank and Wells Fargo Securities, LLC 14

15 Short-Term Rates Rate Comparison In response to the first rate move, most money market yields initially rose, but a number have since rallied. Asset Class Apr Apr _Change_ Fed RRP Triparty (TSY) GCF Repo (TSY) Fed Funds Week Bills Month Bills Day Discos Day CP (Non-Fin) Day CP (Tier-2) Month LIBOR Month LIBOR Month OIS Month OIS Dec. '16 FF Fut Dec. '16 LIBOR Fut Crane 100 MMF YLD Year TSY Note Year TSY Note Year IG Index YNC3M AGY Berm YNC1Y AGY Berm Source: Bloomberg, Wells Fargo Securities, LLC 15

16 Cross Sector Relative Value 0 1 Year

17 Investment Landscape: Short-Term Rates Cross Sector Relative Value < 1 Year 1.6% 1.4% 1.2% 1.0% 0.8% A2/P2 CP Tier 2 CP, along with nontraditional repo are the highest yielding asset classes inside of one year. 0.6% 0.4% 0.2% 0.0% A1/P1 CP O/N 1 Mo 3 Mo 6 Mo 9 Mo 1 Yr Government Repo Non-Traditional Repo Prime Funds A1/P1 CP A2/P2 CP TE VRDNs TAX VRDNs AA Corps AAA TE AA TE AAA LGIP Net Yield Source: Wells Fargo Securities, LLC, Bloomberg, imoneynet, DTCC 17

18 Cross Sector Relative Value 1 5 Years

19 Investment Landscape: Annual Returns for Short Duration Sectors % Asset Backed Securities 2.74% Agencies, 2.18% 2.80% Asset Backed Securities 2.16% 1.82% Asset Backed Securities 2.60% 2.15% 1.89% Asset Backed Securities 4.73% 4.71% 4.64% Treasuries, 7.32% 6.95% Agencies 6.74% Agencies 7.05% Treasuries, 6.61% 5.27% 14.69% Asset Backed Securities, 13.80% 5.98% 5.42% 4.86% Asset Backed Securities, 3.35% 3.15% 2.37%, 1.76% 4.49% Asset Backed Securities, 1.88% 1.61% 1.78% 1.07% 0.91% 1.19% 1.10% Asset Backed Securities, 0.89% % Treasuries, 1.90% 1.83% 1.28% Agencies 1.18% Treasuries, 0.91% Agencies 1.77% Treasuries 1.67% 1.41% Agencies 4.52% Treasuries 3.96% 3.25% Source: Bloomberg, Federal Reserve, Wells Fargo Securities, LLC 5.67% Asset Backed Securities 4.84% 4.70% 5.16% Asset Backed Securities -1.22% -2.68% 4.21% Agencies 2.17% Treasuries, 0.79% Treasuries, 2.35% Agencies 2.32% 1.29% Treasuries, 1.55% Agencies 1.53% Asset Backed Securities, 1.49% 1.03% Agencies 0.85% Treasuries 0.43% Asset Backed Securities 0.78% Agencies 0.424% Treasuries 0.36% 0.72% Agencies 0.70% Treasuries 0.62% Returns shown are the annual total returns of select Bank of America Merrill Lynch indices. This Table of Short Duration Returns is a comprehensive representation of relative sector performance for a 10-year period through 12/31/2014. This material is offered compliments of Wells Capital Management to its clients. It is for your own personal information and we are not soliciting an action based upon it. Past performance is not indicative of future results. 19

20 Investment Landscape: Annual Returns for Short Duration Sectors % Asset Backed Securities 1.625% 1.311% 1.182% Treasuries 0.569% Agencies 0.267% % % Treasuries % Agencies % Asset Backed Securities 9.945% 7.220% 6.156% Asset Backed Securities 5.882% 5.712% Agencies 5.377% Treasuries 4.979% 4.108% Asset Backed Securities 4.830% 4.677% 3.904% Agencies 3.508% Treasuries 3.063% 2.507% 8.992% Agencies 8.544% Asset Backed Securities 8.004% Treasuries 7.995% 7.608% 5.678% 9.585% Agencies 8.635% Treasuries 8.300% Asset Backed Securities 8.155% 7.792% 6.041% % Asset Backed Securities 2.161% 1.820% Agencies 1.183% 1.275% Treasuries 0.907% Asset Backed Securities 2.602% 2.151% 1.888% Agencies 1.767% Treasuries 1.668% 1.406% Asset Backed Securities 4.725% 4.714% 4.638% Agencies 4.515% Treasuries 3.963% 3.253% Source: Bloomberg, Federal Reserve, Wells Fargo Securities, LLC Returns shown are the annual total returns of select Bank of America Merrill Lynch indices. This Table of Short Duration Returns is a comprehensive representation of relative sector performance for a 12-year period through 12/31/

21 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Basis Points Investment Landscape: Corporate Bonds () Corporate Bonds () Corporate spreads have demonstrated stability during the three previous ratetightening cycles OAS Fed Rate Hike Source: Wells Fargo Securities, Bloomberg, Yield Book 21

22 Investment Landscape: Corporate Bonds () Year HG OAS by Sector Median - 25th 75th - Median Last 1-3 Year corporate notes are trading in-line with their 3-Year median spread levels. The energy sector continues to be hampered by 12-year low commodity prices Source: Wells Fargo Securities, Bloomberg 22

23 Investment Landscape: Agency Bonds (1-5 Years) Year Spread by Tenor 75th - Median Median - 25th Last Year Agency Bonds are trading wide of their 3-Year median spread levels Year NC 3M 2-Year NC 3M 3-Year NC 3M 5-Year NC 3M Source: Wells Fargo Securities, Bloomberg 23

24 Short-Term Rates Cross Sector Relative Value 0 5 Years 2.5% 2.0% 1.5% There are numerous investment options in the credit space, 1-5 years with the curve steepening between 2-5 years. 1.0% 0.5% 0.0% A2/P2 CP Non-Trad Repo O/N 1 Mo 3 Mo 6 Mo 9 Mo 1 Yr 18 Mo 2 Yr 30 Mo 3 Yr 4 Yr 5 Yr Government Repo Non-Traditional Repo Prime Funds A1/P1 CP A2/P2 CP TE VRDNs TAX VRDNs AA Corps AAA Taxable AA Taxable AAA TE AA TE AAA LGIP Net Yield Source: Wells Fargo Securities, Bloomberg, imoneynet, DTCC 24

25 Short-Term Rates Government Cross Sector Relative Value 0 5 Years 1.80% 1.60% Agency Callables 1.40% 1.20% 1.00% In the government space, the highest yielding alternative is the FDIC insured Brokered CD market. 0.80% 0.60% 0.40% 0.20% 0.00% O/N 1 Mo 3 Mo 6 Mo 9 Mo 1 Yr 18 Mo 2 Yr 30 Mo 3 Yr 4 Yr 5 Yr Govt Money Funds AAA LGIP Net Yield T-Bills T-Notes Agency Discos Agency Bullets Agency Callables Brokered CDs - Program Brokered CDs Source: Wells Fargo Securities, Bloomberg 25

26 Tactical Liquidity Portfolio Segmentation to Optimize Investment Objectives

27 Positioning Corporate Cash Portfolios Curve steepening in the current environment is causing investors to look at their strategic cash allocations to see if there are opportunities to extend or introduce new asset classes. Segmentation of the Corporate/Public Cash Portfolio (for illustrative purposes only) Liquidity, stability Stability of principal of Principal Operating Cash (Horizon - daily) Reserve Cash (Horizon - Quarterly) Restricted Cash (Horizon - longer-term) Strategic Cash (Horizon - longer-term) Less liquidity, higher yields, more price Less liquidity, volatility higher yields, more price volatility Source: ICI, Wells Fargo Securities, LLC Q1 Q2 Q3 Q4 27

28 Positioning Corporate Cash Portfolios- Your Bucket List Corporate Cash Portfolio Segments/Buckets have different Durations, Objectives, Strategies and Return Expectations Operating Cash Reserve/Core Cash Strategic Cash Investment Horizon 0 6 months 6 months 2 years 1 5 years Portfolio Duration Days 6 18 months 2 3 years Cash Flow Volatility High Low/Maturity Matched Very Low/Maturity Matched Strategy Money Market/Cash Equivalents Incremental Duration and Credit Risk Incremental Duration and Credit Risk Benchmark N/A Treasury-based LIBOR + -based Index-based (strategy-specific) Source: Wells Fargo Securities, LLC 28

29 Yield Positioning Corporate Cash Portfolios Product Segmentation Across Liquidity Buckets Money Markets < 12M S/T Investments > 12M Products can be placed in multiple buckets. However, certain products are more suited to certain investment styles based on relative liquidity and duration profiles. Operational Cash Bank Deposits Sweep Accounts Money Market Funds Treasury Bills Discount Notes Repo Commercial Paper Certificates of Deposit TE/Taxable VRDNs Reserve Cash Commercial Paper Certificates of Deposit Short Corporate Bonds Treasury Bills/Notes Agency Discos/Bullets Agency Municipal Securities Floaters Restricted/Strategic Cash Certificates of Deposit Brokered CDs Corporate Bonds Treasury Notes Agency Callables Agency Bullets Municipal Securities Duration Source: Wells Fargo Securities, LLC 29

30 Portfolio Construction Approaches Basic Approach $30 $30 $25 $25 The Basic Approach manages all expected cash outflows through existing cash balances, represented by the grey area. The cash balances represented by the light and dark blue areas are not anticipated to be used and can be invested further out on the curve to augment yield. $20 $15 $10 $5 $4M Short-term inv. (6 12M) $9M Short-term inv. (1-3Y) MMFs, LGIP, O/N Inv. $20 $15 $10 $5 $0 7-Jan 7-Feb 7-Mar 7-Apr 7-May 7-Jun 7-Jul 7-Aug 7-Sep 7-Oct 7-Nov 7-Dec $0 Cash Balance Forecast Source: Wells Fargo Securities, LLC 30

31 Portfolio Construction Approaches Maturity Matching Approach $30 $30 MMFs, LGIP, O/N Inv. $25 $25 The Maturity Matching Approach identifies the size and dates of known cash outflows and invests an equivalent amount of cash to those dates. Liquidity is partially managed through maturity matching, allowing short-term investments to constitute a larger part of the overall portfolio. $20 $15 $10 $5 Short-term inv. (1-3Y) Short-term inv. (6-12M). $20 $15 $10 $5 $0 $0 Cash Balance Forecast Source: Wells Fargo Securities, LLC 31

32 Investment Policy Samples 32

33 Disclosure Appendix This publication is intended for institutional accounts only (as defined in FINRA Rule 4512), please do not forward. Strategist Commentary is a product of Wells Fargo Securities Fixed Income Sales and Trading and is not a product of Wells Fargo Securities, LLC s Research, Economics and Strategy. The views expressed herein might differ from those of Research, Economics and Strategy. Important Information for Non- Recipients This report is prepared by Wells Fargo Securities, LLC in accordance with law and applicable rules and regulations for use by institutional investors. The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This report is not intended for, and should not be relied upon, by retail investors. Please consult your Investment Representative for additional information. residents are directed to wellsfargo.com for investment and related services. Important Information for Australian Recipients Wells Fargo Securities, LLC is exempt from the requirements to hold an Australian financial services license in respect of the financial services it provides to wholesale clients in Australia. Wells Fargo Securities LLC is a broker dealer registered with the Securities and Exchange Commission and a member of FINRA and SIPC. Wells Fargo Securities, LLC is regulated under laws which differ from Australian laws. Any offer or documentation provided to you by Wells Fargo Securities, LLC in the course of providing the financial services will be prepared in accordance with the laws of the United States and not Australian laws. Important Disclosures Relating to Conflicts of Interest and Potential Conflicts of Interest Wells Fargo Securities, LLC may sell or buy the subject securities to/from customers on a principal basis. Wells Fargo Securities, LLC has or may have proprietary positions in the securities mentioned herein. The trading desk has or may have proprietary positions in the securities mentioned herein. The author's compensation is based on, among other things, Wells Fargo Securities, LLC's overall performance, the profitability of Wells Fargo Securities, LLC's Markets Division and the profitability of the trading desk. This report is for your information only and is not an offer to sell or a solicitation of an offer to buy the securities or instruments named or described in this report. Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information. The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, LLC to be reliable, but Wells Fargo Securities, LLC does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities, LLC at this time and are subject to change without notice. Wells Fargo Securities, LLC and its affiliates may from time to time provide advice with respect to, acquire, hold or sell a position in, the securities or instruments named or described in this report. About Wells Fargo Securities Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A. Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC are distinct entities from affiliated banks and thrifts. Copyright 2016 Wells Fargo & Company SECURITIES: NOT FDIC:-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE 33