Liquidity Management: Beyond Quantitative Easing

Transcription

1 Liquidity Management: Beyond Quantitative Easing June 2014

2 Agenda 1. Assessing Risk: Current Market Conditions a. Global Macroeconomics b. Monetary Policy c. Quantitative Easing (QE) d. Asset Bubbles e. Great Rotation 2. Post QE/Higher Interest Rates 3. Impact to Liquidity Managers 4. Money Market Regulatory Reform 5. Question & Answers 2

3 Assessing Risk: Current Market Conditions

4 Global Business Cycle in a Trend of Modest Improvement 4 Note: This is a hypothetical illustration of a typical business cycle. There is not always a chronological progression in this order, and there have been cycles when the economy has skipped a phase or retraced an earlier one. Economically sensitive assets include stocks and high-yield corporate bonds, while less economically sensitive assets include Treasury bonds and cash. *A growth recession is a significant decline in activity relative to a country s long-term economic potential. We have adopted 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 the most for asset returns. We use the classic definition of recession, involving an outright contraction in economic activity, for developed economies. Please see endnotes for a complete discussion. Source: Fidelity Investments (AART).

5 % Global Debt to GDP Trends 250 Debt as a % of GDP Eurozone China U.S. Japan 5 Source:

6 % Coordinated Global Monetary Policy Federal Reserve European Central Bank Bank of England Bank of Japan 6 Source: Bloomberg as of 4/30/14

7 Central Banks Resort to Non-Traditional Policy 30% Federal Reserve Assets as a % of GDP 180% Key Central Bank Assets as a % of GDP QE1 QE2 QE3 160% 25% 140% 20% 120% 100% 15% 80% 10% 60% 40% 5% 20% 0% 0% Federal Reserve Bank European Central Bank Bank of England Bank of Japan 7 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.

8 Billion Liquidity From QE Flows into Global Markets $1,400 $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 -$100 Bond & Equity Fund Cumulative Flows Equity Bond Source: Strategic Insight Simfund as of 3/31/14 Note: Flows include both mutual funds and ETFs 8

9 $Billions Investors Respond To Bond Bull Market 1,350 Fixed Income Sector Asset Growth 1,200 1, Intermediate & Long-Term Bond Short-Term Bond Funds Ultrashort Bond Funds Source: Strategic Insight (Simfund), Morningstar, imoneynet, and Bloomberg as of 3/31/14 9

10 Yield (%) QE Has Driven Bond Yields and Valuations Year Government Bond Yields US UK Germany Japan 10 Source: Bloomberg as of 4/30/14

11 Option Adjusted Spread (bps) Quest For Yield Has Driven Corporate Spreads Lower 800 Barclays Credit Index Sub-Sector OAS Industrials Utilities Financials 11 Source: Barclays as of 4/30/14

12 Index Value (Indexed to 100 at 6/30/08) QE Has Lead To Higher Equity Valuation S&P 500 FTSE 100 DAX Nikkei Source: Bloomberg as of 4/30/14

13 Index Value QE Taper Talks Creates Emerging Market Volatility MSCI Emerging Markets Index Barclays Emerging Markets USD Aggregate Index 13 Source: Barclays and Bloomberg as of 4/30/14

14 Ratio Demographics are an Important Driver of Interest Rates Yield (%) US Borrowers/Savers 12 Month Rolling Average 10-Year U.S. Treasury Yield 14 Source: Bloomberg and Haver as of 4/30/14

15 Roadmap To Higher U.S. Interest Rates

16 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 16

17 Real GDP YoY ( %) Unemployment Rate (%) PCE YoY (%) Federal Reserve s Economic Projections Inflation Threshold Inflation Forecast Actual Inflation Actual Unemployment Rate Unemployment Rate Forecast Actual GDP GDP Forecast 17 Source: Bloomberg and Federal Reserve FOMC Forecast as of March 19, 2014

18 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 U.S. Inflation Risks Remain Subdued U.S. Monetary Base and Velocity Monetary Base Money Velocity Key Drivers of Inflation $ Trillions Money Velocity x 1.95x 1.90x 1.85x 1.80x 1.75x 1.70x 1.65x 1.60x 1.55x 1.50x 18 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.

19 Jobless Claims (thousands) Jobless Claims Heading to Pre-Recession Levels Initial Claims Initial Claims, 4-Week Moving Average Source: Department of Labor, Bloomberg as of 4/25/14 19

20 Participation Rate (%) Unemployment Rate (%) U.S. Labor Participation Rates Continues Downward Trend 67 Labor Force Participation Rate Unemployment Rate Source: Bureau of Labor Statistics, Bloomberg as of 4/30/14 20

21 Thousands of Employees Employment Creation Positive, But Not Impressive m/m Change in Non-Farm Payrolls 6 Month Avg of m/m Chg Source: Bureau of Labor Statistics, Bloomberg as of 4/30/14 21

22 Employment Level Indexed to 100 at Start of Recession Post Recession U.S. Employment Recovery s 115 Employment: Pre and Post Recession Most Recent Recession Years Before/After Start of Recession 22 Source: NBER, BLS/Haver as of 2/28/14. Data represents Civilian Employment (SA, Thous).

23 % Lackluster GDP Growth Despite Historic Fed Policy 8.0 Contributions to Real GDP (% change annualized) Net Exports Government Investment Consumption Total Source: Bureau of Economic Analysis as of 3/31/14 23

24 % Change YoY Index Level Potential Headwinds for GDP US Personal Consumption Expenditures US Personal Income U. of Michigan Survey of Consumer Confidence Sentiment 24 Source: Left Chart - Bureau of Economic Analysis, Bloomberg as of 3/31/14; Right Chart U. of Michigan Survey Research Center, Bloomberg as of 4/30/14. Note: Data represents % change year to year, SAAR, Bil.$

25 30-Year Fixed Rate (%) Refinance Index Value Higher Mortgage Rates Could Dampen Recovery Year Fixed Mortgage Rate vs. Refinance Index 7, , , , , , , Source: Bankrate.com, Mortgage Bankers Association, Bloomberg as of 4/25/14 Note: 30-year mortgage rate represents the overnight national average.

26 Impact To US Liquidity Managers

27 Number of Participants Consensus Builds for a 2015 Rate Hike Federal Reserve Board Rate Expectations Appropriate Timing of Policy Firming Appropriate Pace of Policy Firming (March 2014) Sep-2013 Dec-2013 Mar-2014 Median Target Fed Funds Rate at Year End Fed Meeting Date Longer Run Mar Dec Source: Federal Reserve as of 3/19/14

28 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 % Q/E Tapering Expectations and Timing of First Rate Hike 1.60 Forward Fed Funds Futures 1.40 Sep Apr May Source: Bloomberg as of 4/30/14

29 Liquidity Strategies Risk Profiles Attribute Portfolio 1 Portfolio 2 Portfolio 3 OAD (Months) Spread Duration Yield 0.39% 0.56% 0.82% All returns represent hypothetical annualized gross yields as of April 2, 2014 and do not reflect the deduction of any fees and expenses which would reduce returns. The above referenced chart does not represent any current Fidelity or Pyramis Strategy. For illustrative purposes only. Hypothetical portfolio data has inherent limitations and may not reflect the effect that any material market or economic factors may have had on Pyramis' use of the models. Hypothetical performance of a model is no guarantee of future results. 29 For Institutional Client Use Only

30 Hypothetical Impact of Instantaneous Shocks Scenario 1 Fed Tightens 25 bp per meeting / Spreads widen 50 bps Portfolio 1 Portfolio 2 Portfolio 3 Theoretical Value Theoretical Value Theoretical Value Initial Investment $100,000,000 $100,000,000 $100,000,000 Tightening 1 (1 Year Later) $100,400,000 $100,580,000 $100,840,000 Tightening 2 $100,400,000 $100,500,000 $100,640,000 Tightening 3 $100,410,000 $100,370,000 $100,250,000 Tightening 4 $100,540,000 $100,420,000 $100,180,000 Tightening 5 $100,740,000 $100,540,000 $100,170,000 Tightening 6 $100,940,000 $100,600,000 $99,980,000 Theoretical Ending Value at Year 2 $101,260,000 $100,850,000 $100,110,000 Hypothetical portfolio data has inherent limitations and may not reflect the effect that any material market or economic factors may have had on Pyramis' use of the models. The performance shown does not relate to any Fidelity or Pyramis strategy. Hypothetical performance of a model is no guarantee of future results For Illustrative purposes only 30

31 Hypothetical Impact of Instantaneous Shocks Scenario 2 Fed Tightens 50 bp per meeting / Spreads widen 100 bps Portfolio 1 Portfolio 2 Portfolio 3 Theoretical Value Theoretical Value Theoretical Value Initial Investment $100,000,000 $100,000,000 $100,000,000 Tightening 1 (1 Year Later) $100,400,000 $100,570,000 $100,830,000 Tightening 2 $100,320,000 $100,310,000 $100,280,000 Tightening 3 $100,250,000 $99,940,000 $99,360,000 Tightening 4 $100,450,000 $99,950,000 $99,080,000 Tightening 5 $100,760,000 $100,080,000 $98,920,000 Tightening 6 $101,080,000 $100,100,000 $98,390,000 Theoretical Ending Value at Year 2 $101,660,000 $100,490,000 $98,500,000 Hypothetical portfolio data has inherent limitations and may not reflect the effect that any material market or economic factors may have had on Pyramis' use of the models. The performance shown does not relate to any Fidelity or Pyramis strategy. Hypothetical performance of a model is no guarantee of future results For Illustrative purposes only 31

32 Theoretical Loss Theoretical Loss Hypothetical Impact of Instantaneous Shocks 3.0% 2.86% 2.5% 2.25% 2.0% 1.90% 1.5% 1.0% 0.94% 1.11% 1.13% 0.5% 0.54% 0.19% 0.50% 0.0% Portfolio 1 Portfolio 2 Portfolio 3 Largest Interest Rate Shock: Dec 1980: 3-Month Bills Rise 228 bps in one week Interest Rate Shock: 1994: 3-Month Bills Rise 128 bps over 3 months Largest Spread Widening Sep 2008: TED Spread Widens 192 bps in one week Yield Hypothetical data has inherent limitations due to the retroactive application of a model designed with the benefit of hindsight and may not reflect the effect that any material market or economic factors may have had on Pyramis' use of the model. Thus, Simulated Capabilities are speculative and of extremely limited use to any investor and should not be relied upon. Hypothetical performance of the model is no guarantee of future results. 32

33 Hypothetical Impact of Instantaneous Shocks Theoretical Value of Initial $100 Million Investment Portfolio 1 Portfolio 2 Portfolio 3 Largest Interest Rate Shock December Month Bills Rise 228 bps in One Week $99,460,000 $98,890,000 $97,750,000 Interest Rate Shock Month Bills Rise 128 bps Over 3 Months $99,810,000 $99,500,000 $98,870,000 Largest Spread Widening September 2008 TED Spread Widens 192 bps in One Week $99,060,000 $98,100,000 $97,140,000 Hypothetical portfolio data has inherent limitations and may not reflect the effect that any material market or economic factors may have had on Pyramis' use of the models. The performance shown does not relate to any Fidelity or Pyramis strategy. Hypothetical performance of a model is no guarantee of future results For Illustrative purposes only 33

34 Regulatory Reform Update

35 Overview of SEC Rule Proposal Alternative 1: Prime & municipal funds float unless such fund restricts each shareholder daily redemption to $1m Treasury and Government funds exempt Proposed effective date two years from proposal adoption Alternative 2: When weekly liquidity of all prime and municipal funds 15% or less 2% redemption fee unless board chooses lower or no fee Board may gate redemptions for up to 30 days and may also lift gate Treasury & Government funds exempt can voluntarily opt in Proposed effective date one year from proposal adoption Alternative 3: Prime & municipal funds float unless such fund restricts each shareholder daily redemption to $1m When weekly liquidity of all prime and municipal funds 15% or less 2% redemption fee unless board chooses lower or no fee Board may gate redemptions for up to 30 days and may also lift gate Treasury & Government funds exempt can voluntarily opt in 35

36 Money Market Fund Reform Timeline 2013 Key Events Feb 2013 FSOC proposal comment deadline (extended from Jan 18) Apr 2013 SEC rule proposal issued Sept 2013 SEC comment deadline Jan 2013 Obama names Mary Jo White as SEC Chairman Feb/Mar 2013 Mary Jo White confirmed as SEC Chairman Aug 2013 Stein and Piwowar replace Walters and Paredes at SEC Future Timeline Rule Proposal Expected Q2/Q Proposed Effective Date for Alternative 2 Q2/Q Proposed Effective Date for Alternative Q2/Q3 Source: imoneynet and Fidelity as of 9/30/13 36

37 Fidelity s Perspective Municipal/tax-exempt money market funds should be excluded from any structural reforms The definition of a retail money market fund should be based on Social Security Number account registration Floating the NAV is not an effective means to achieve the SEC s stated goal of stemming rapid and significant redemptions Liquidity fees and redemption gates is a more effective means to achieve the SEC s goals Redemption fee should be reduced from 2% to 1% The combination of liquidity gates and redemption gates and the floating NAV would impose excessive costs and burdens on the industry The compliance period should be extended to three years following the effective date of a final rule 37

38 Important Information 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. For Institutional Investor Use only. Fidelity Investments & Pyramid Design is a registered service mark of FMR LLC. Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI Not FDIC insured. May lose value. No bank guarantee For Institutional Client Use Only