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J.P. Morgan Asset Management
New York February 2–3, 2011
Best Practices for Maximizing Cash Returns in Uncertain MarketsApril 2013
Stephen Parry, Executive Director, J.P. Morgan Global [email protected] 315 5754
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
OverviewOverview
Foreign central banks have flooded the markets with liquidity Foreign central banks have flooded the markets with liquidity
What are corporate treasurers doing now?
Regulatory reform - what is the potential impact for investors? Regulatory reform what is the potential impact for investors?
Interest rates are low, but will they head higher soon?
When rates normalize how will my portfolio perform?y p p
Which way are credit spreads heading?
In summary – what are the issues and opportunities?
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION1
Foreign central banks have flooded the markets with liquidity
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
2
Bond markets reflect a global monetary experimentBond markets reflect a global monetary experimentUnprecedented Central Bank Intervention… …Has Driven Down Developed Market Yields…
Size of central bank balance sheet (in Millions of USD) US & German 2 Year Yields (%) Japanese 2 Year Yields (%)
3 500 000
4,000,000
4,500,000
3 500 000
4,000,000
4,500,000Federal Reserve
Bank of Japan
Bank of England
European Central Bank1.0
1.2
6
7 US 2 Year RatesGerman 2 Year RatesJapanese 2 Year Rates
2,500,000
3,000,000
3,500,000
2,500,000
3,000,000
3,500,000
0.84
5
1,500,000
2,000,000
1,500,000
2,000,000
0.4
0.6
2
3
500,000
1,000,000
500,000
1,000,000
0.20
1
Source: Bloomberg Data as of February 28 2013 S Bl b JPMSI D t f M h 27 2013
00
Dec
-99
Jun-
00D
ec-0
0Ju
n-01
Dec
-01
Jun-
02D
ec-0
2Ju
n-03
Dec
-03
Jun-
04D
ec-0
4Ju
n-05
Dec
-05
Jun-
06D
ec-0
6Ju
n-07
Dec
-07
Jun-
08D
ec-0
8Ju
n-09
Dec
-09
Jun-
10D
ec-1
0Ju
n-11
Dec
-11
Jun-
12D
ec-1
2
0.0-1
Dec
-99
Jul-0
0M
ar-0
1O
ct-0
1M
ay-0
2D
ec-0
2Ju
l-03
Feb-
04S
ep-0
4A
pr-0
5N
ov-0
5Ju
n-06
Jan-
07A
ug-0
7M
ar-0
8O
ct-0
8M
ay-0
9D
ec-0
9Ju
l-10
Feb-
11S
ep-1
1A
pr-1
2N
ov-1
2
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Source: Bloomberg. Data as of February 28, 2013.
3
Source: Bloomberg, JPMSI. Data as of March 27, 2013
Mutual fund flows show money moving out of stocks and money market funds and into bond fundsfunds and into bond funds
Fund Flows
Billions, USD AUMYTD 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Domestic Equity 4 608 17 (156) (132) (81) (29) (149) (65) 0 18 101 120 (26) 55 261 176Domestic Equity 4,608 17 (156) (132) (81) (29) (149) (65) 0 18 101 120 (26) 55 261 176World Equity 1,689 35 3 4 58 28 (80) 139 149 106 71 24 (3) (22) 53 11Taxable Bond 2,899 43 254 137 224 310 21 98 45 27 5 40 125 76 (36) 8Tax-Exempt Bond 593 10 50 (12) 11 69 8 11 15 5 (15) (7) 17 11 (14) (12)Hybrid 1,042 18 46 29 29 12 (25) 41 18 37 48 38 8 9 (36) (14)Money Market 2,653 (43) 0 (124) (525) (539) 637 654 245 62 (157) (263) (46) 375 159 194Money Market 2,653 (43) 0 (124) (525) (539) 637 654 245 62 (157) (263) (46) 375 159 194
$140,000Municipals
High Yield and Bank Loans
+$129 Bln
Mutual Fund and ETF Fixed Income Flows for 2012
$1,600
Cumulative Flows into Stock & Bond FundsIncludes both mutual funds and ETFs, $ billions
$80,000
$100,000
$120,000 High Yield and Bank Loans
Governments
Intermediate Term
Long Term
Multisector and Absolute Return
$800
$1,000
$1,200
$1,400 Feb. ’13: $1,447 billion into bond funds and fixed income ETFs since ’07
$20,000
$40,000
$60,000 +$53 Bln+$46 Bln
+$18 Bln+$28 Bln
$200
$400
$600
$800
Bonds
Feb. ’13: $278 billion into stock funds and equity ETFs since ’07
Source: Investment Company Institute, J.P. Morgan Asset ManagementData include flows through February 2013 and exclude ETFs. ICI data are subject to periodic revisions. World equity flows are inclusive of emerging market, global equity and regional equity flows. Hybrid flows include asset
ll ti b l d f d fl ibl f d fl ibl tf li d i d i fl D t f 3/31/13
-$20,000
$0
-$0.637 Bln
Source: Morningstar US Open end ETF and MM Flows as of February 2013
$0'07 '08 '09 '10 '11 '12 '13
Stocks
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
allocation, balanced fund, flexible fund, flexible portfolio and mixed income flows. Data are as of 3/31/13.
4
Source: Morningstar, US Open-end, ETF, and MM Flows as of February 2013.
Strong technicals and good fundamentals have driven spreads and yields lowerlowerAs February 28, 2013
Option Adjusted Spread (bps) Yield (%)
700
800
Option Adjusted Spread (bps)BofA Merrill Lynch 1-5 Year Corporate A and above
Yield (%)BofA Merrill Lynch 1-5 Year Corporate A and above
8
9
500
600
6
7
300
400
Average spread
Average spread 12/31/09 – 2/28/13:
128 bps3
4
5
0
100
200g p
12/31/02 – 8/31/07: 56 bps
128 bps
1
2
0
Dec
-96
Feb-
98
Feb-
99
Feb-
00
Feb-
01
Feb-
02
Feb-
03
Feb-
04
Feb-
05
Feb-
06
Feb-
07
Feb-
08
Feb-
09
Feb-
10
Feb-
11
Feb-
12
Feb-
13
Source: BofA Merrill Lynch Indices. The above graph is shown for illustrative purposes only. Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice
0
Dec
-96
Feb-
98
Feb-
99
Feb-
00
Feb-
01
Feb-
02
Feb-
03
Feb-
04
Feb-
05
Feb-
06
Feb-
07
Feb-
08
Feb-
09
Feb-
10
Feb-
11
Feb-
12
Feb-
13
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
5
Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice
What are corporate treasurers doing now?
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
6
Segmenting liquidity needs for return optimizationSegmenting liquidity needs for return optimization
Risk ProfileTotal balance
sheet cashRisk Profile sheet cash
Strategiccash
Restrictedcash
Reservecash
O ti R
Operatingcash
cash
R t i t d St t iOperating
Cash typically used for daily operating needs may be subject to unforeseen
Reserve
Investment horizon of six to nine months or longer
Fairly static, d
Restricted
Balances trapped in highly regulated jurisdictions or with repatriation-related tax issues
Strategic
No short-term forecasted use
Cash on balance sheet that has not b hi t i llunforeseen
volatility
Requires preservation of principal
Late-day access
S d li idit
same-day access not needed
Cash set aside for possible acquisition, stock buy back or R&D
tax issues
Cash collateral tied to credit agreements or derivative contracts
been historically used
Investment horizon of one year or longer
The above chart is for illustrative purposes only
Same-day liquidity
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION7
The above chart is for illustrative purposes only.
Deploying corporate cashDeploying corporate cashCorporate Cash as a % of Current AssetsS&P 500 companies – cash and cash equivalents, quarterly30%
Corporate Growth
Capital Expenditures M&A Activity
$bn, nonfarm nonfinancial capex, quarterly value of deals completed
$1 400
$1,600
$
$1,300
20%
22%
24%
26%
28%
$600
$800
$1,000
$1,200
$1,400
$900
$1,000
$1,100
$1,200
Cash Returned to ShareholdersDividend Payout Ratio
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '1214%
16%
18%
$0
$200
$400
$600
$700
$800
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
$100
$120
$140
$160
$27
$30
$33
50%
60%
Cash Returned to ShareholdersDividend Payout RatioS&P 500 companies, rolling 4-quarter averages, billions USDS&P 500 companies, LTM
Dividends per Share
$40
$60
$80
$100
$18
$21
$24
30%
40%
Share Buybacks
$20$15'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
20%
Source: Standard & Poor’s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management.
(Top left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is the quarterly value of deals completed and capital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poor’s, FactSet, J.P. Morgan A sse t Management. (Bottom right) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. Data are as of 3/31/13.
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION8
Strategies with more yield are attracting corporate cashStrategies with more yield are attracting corporate cash
Money Market Fund AUM ($)
40 000 000 000600 000 000 000
Managed Reserves & Short Duration AUM ($)
30,000,000,000
35,000,000,000
40,000,000,000
550,000,000,000
600,000,000,000JPMorgan Money Market Funds Managed Reserves Short Duration
20,000,000,000
25,000,000,000
450,000,000,000
500,000,000,000
10,000,000,000
15,000,000,000400,000,000,000
0
5,000,000,000
300,000,000,000
350,000,000,000
7 7 7 8 8 8 8 8 8 9 9 9 9 9 9 0 0 0 0 0 0 1 1 1 1 1 1 2 2 2 2 2 2 3
Chart shown for illustrative and discussion purposes only. Source: J.P. Morgan Asset Management. Data as of February 28, 2013.Opinions and statements of financial market trends that are based on c rrent market conditions constit te o r j dgment and are s bject to change itho t notice
Aug
-0O
ct-0
Dec
-0Fe
b-0
Apr
-0Ju
n-0
Aug
-0O
ct-0
Dec
-0Fe
b-0
Apr
-0Ju
n-0
Aug
-0O
ct-0
Dec
-0Fe
b-1
Apr
-1Ju
n-1
Aug
-1O
ct-1
Dec
-1Fe
b-1
Apr
-1Ju
n-1
Aug
-1O
ct-1
Dec
-1Fe
b-1
Apr
-1Ju
n-1
Aug
-1O
ct-1
Dec
-1Fe
b-1
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION9
Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice
After narrowing dramatically, yield spreads among strategies appear to have stabilizedhave stabilized
Yield (%)1.81.8
Liquidity Managed Reserves Short Duration 1-5 Years
1.4
1.6
1.4
1.6
0 8
1.0
1.2
0 8
1.0
1.2
0.4
0.6
0.8
0.4
0.6
0.8
0.0
0.2
0.0
0.2
1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 3 3 3
Source: JPMorgan Asset Management. Data as of March 20, 2013Past performance is not indicati e of f t re res lts
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Feb-
13
Mar
-13
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION10
Past performance is not indicative of future results.
What are the options today?What are the options today?
Type of Portfolio Credit Quality Minimum Duration (yrs) Average Market
Yield (%)
Go ernment Mone Market A 1+ 0 1 0 16Government Money Market A-1+ 0.1 0.16
Credit Money Market A-1 0.1 0.26
Managed Reserves A 0.72 0.43g
Managed Reserves BBB 0.74 0.47
Short Duration A 2.60 0.80
Short Duration BBB 2.60 0.90
Data as of March 26, 2013The above is shown for illustrative purposes only
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
11
The above is shown for illustrative purposes only.
Regulatory reform – what is the potential impact for investors?
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
12
Money market fund regulation: Where are we going and what does it mean?
Investors value a stable NAV
Current Situation Possible SEC Proposal(s) Potential Impact
After significant reform in 2010, regulators are committed to additional
Money market fund regulation: Where are we going and what does it mean?
The FSOC proposed three alternatives in November 2012
more than additional yield. Cash moves from Prime Funds into Government Funds
Supply/demand imbalance may occur as demand for short
Prime Funds = Floating NAV
Treasury & Agency Funds = Stable NAV
regulators are committed to additional reform
Floating NAV
U.S.Stable NAV with “buffer” and
Treasuries, Agencies, and Repo backed by Treasuries and/or Agencies increases.
Yields on short Treasuries and Agencies may fall.
Muni Funds = Stable NAV ?
Stable NAV with buffer and minimum balance at risk
Stable NAV with “buffer” and other measures
Spread between Treasuries/ Agencies and “credit” widen → yield differential between Gov’tand Credit MMF’s may widen.
Demand may increase for t t ?
Concerns will remain around tax and accounting issues until a firm
ruling is made.
There remains a wide range of separate accounts?
─ Customization / Control
─ Search for Yield
Potential for greater use of
•Stand-by liquidity facility•Ability to suspend redemptions•Enhanced transparency
Other optionsThere remains a wide range of regulatory proposals that must be viewed/considered in the wider context of the Cash Management industry as a whole.
bank deposits
In Europe, Bloomberg recently received a report from the European Commission about it’s proposal for money market reform. Solution is coalescing around French style money market funds (floating rate NAV for all fund types). There is the potential to keep stable NAV, but must have a 3% buffer (held in cash).
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION13
Interest rates are low, but will they head higher soon?
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
14
Macro scenario probabilities & investment expectations: 2Q13
Base Case (80%): Sub Trend Recovery continues through 2013GDP 0 3%; Inflation 1 3%
Macro scenario probabilities & investment expectations: 2Q13ContractionExpansion
Recession (5%) GDP <0%; Inflation 0%– GDP 0-3%; Inflation 1-3%
– For the fifth consecutive year, we are forecasting below trend growth indeveloped and emerging economies
– Positives for global GDP include: the recovery in U.S. housing,bottoming of growth in China & Brazil, and averting a serious recessionin Europe due to austerity fatigue. Continuing central bank debt
ti ti l i k t f fi i l t d h
– GDP <0%; Inflation ~0%– We reduced our expectation for recession, as the lagged effect of negative
real rates is expected to boost growth in 2013– Recession could still result from public sector austerity leading to reduced
consumption leading to a slower rate of employment gains in a negativefeedback loop
monetization also improves markets for financial assets, and hence,funding
– Headwinds to growth include fiscal drag in the U.S., official restraint ofthe property sector in China, and continuing imbalances betweennorthern and southern Europe
– High yield, local emerging market debt and IG financials are the team’s
– Government bonds yields have risen sufficiently to offer attractive returns inthis scenario
Crisis (5%)– The most likely tail event is geopolitical (MENA, East Asia)– A smaller concern is that social unrest in southern Europe boils overfavorite sectors
Above Trend Growth (10%)– GDP >3%; Inflation ~2.5%– Unemployment rates continue to fall in the U.S., leading to a virtuous
cycle of income growth and spending. Pent up demand for autos and
– A smaller concern is that social unrest in southern Europe boils over,causing capital flight from a weak European country
– We are underweight safe haven assets, as we do not consider this scenariolikely
Stagflation (0%)GDP 0% I fl ti 3%cycle of income growth and spending. Pent up demand for autos and
housing sustain the growth– The weaker Japanese yen leads to more domestic consumption and
capital spending in Japan– A pick up in spending on infrastructure in Brazil (World Cup 2014,
Olympics 2016) and China (social housing) leads to stronger thanexpected EM growth
– GDP <0%; Inflation >3%– Central banks tacitly permit inflation to rise, targeting nominal GDP as real
growth falls– In order to avoid debt deflation, inflation picks up even as real demand
remains tepid while savings rates rise.– Commodities and inflation protected government bonds perform bestexpected EM growth
– Fears that QE3 will end during 2013 cause government bond yields torise sharply throughout the world
– Investors concerned about a growth scare favored shorting Treasuriesand going long EMFX to benefit from global rebalancing
p g p
Source: GFICC Investment Strategy Team. As of March 12, 2013. Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change itho t notice There can be no g arantee the ill be met
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
15
without notice. There can be no guarantee they will be met.
In spite of massive fiscal and monetary stimulus GDP growth remains below trendbelow trend
Size of Fed’s balance sheet ($ Millions)
U.S. GDP Quarterly (% Annualized)
103 500 000
Trend GDP
6
8
10
3,000,000
3,500,000
Federal Reserve Balance Sheet US GDP Quarterly (Annualized)
Trend GDP
0
2
4
2,000,000
2,500,000
-4
-2
1,000,000
1,500,000
-10
-8
-6
0
500,000
Source: Bloomberg As of March 28 2013
Dec
-99
Apr
-00
Aug
-00
Dec
-00
Apr
-01
Aug
-01
Dec
-01
Apr
-02
Aug
-02
Dec
-02
Apr
-03
Aug
-03
Dec
-03
Apr
-04
Aug
-04
Dec
-04
Apr
-05
Aug
-05
Dec
-05
Apr
-06
Aug
-06
Dec
-06
Apr
-07
Aug
-07
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Dec
-09
Apr
-10
Aug
-10
Dec
-10
Apr
-11
Aug
-11
Dec
-11
Apr
-12
Aug
-12
Dec
-12
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
16
Source: Bloomberg. As of March 28, 2013
Interest rates can stay low for a long timeInterest rates can stay low for a long time
10-year Government Bond Rates (%)
5 0
4.0
4.5
5.0
Japanese 10-year Rates US, UK, Germany 10-year Rates equally weighted: starting June 2008
2.5
3.0
3.5
1.0
1.5
2.0
0.0
0.5
n-95
n-95
v-95
r-96
p-96
b-97
ul-9
7c-
97y-
98ct
-98
r-99
g-99
n-00
n-00
v-00
r-01
p-01
b-02
ul-0
2c-
02y-
03ct
-03
r-04
g-04
n-05
n-05
v-05
r-06
p-06
b-07
ul-0
7c-
07y-
08ct
-08
r-09
g-09
n-10
n-10
v-10
r-11
p-11
b-12
ul-1
2c-
12
Jan
Jun
Nov Ap Sep
Feb
Ju Dec
May Oc
Ma
Aug
Jan
Jun
Nov Ap Sep
Feb
Ju Dec
May Oc
Ma
Aug
Jan
Jun
Nov Ap Sep
Feb
Ju Dec
May Oc
Ma
Aug
Jan
Jun
Nov Ap Sep
Feb
Ju Dec
Source: JPMSI Data as of March 31 2013 The chart is shown for illustrative purposes only
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
17
Source: JPMSI. Data as of March 31, 2013. The chart is shown for illustrative purposes only.
When will the Fed end its zero interest rate policy?
10
When will the Fed end its zero interest rate policy?U.S. Unemployment Rate (%) U.S. Labor Force Participation Rate (%)
966
7
8
7.6%65
6
6.5
64
4
5
n-07
n-08
n-09
n-10
n-11
n-12
n-13
63Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
63.3%
Jan
Jan
Jan
Jan
Jan
Jan
Jan
S Bl b D t f 4/5/13 Th b i h f ill t ti l O i i d f t b d t k t diti d bj t t h ith t ti
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION18
Source: Bloomberg. Data as of 4/5/13. The above is shown for illustrative purposes only. Opinions and forecasts are based on current market conditions and are subject to change without notice.
When does the market expect interest rates to rise?When does the market expect interest rates to rise?
When does the market expect interest rates to rise?When does the Fed expect interest rates to rise?
Appropriate Timing of Policy Firming
Fed Funds (%)
0.713
14
Number of Respondents
Appropriate Timing of Policy Firming March 2013 FOMC Meeting
0.5
0.6
10
12
0.3
0.4
4
6
8
0.1
0.2
1
4
12
4
Source: Bloomberg. Left Chart: Data as of March 20, 2013. Right Chart: Data as of March 31, 2013.The chart is shown for illustrative purposes only
0
Mar
-13
May
-13
Jul-1
3
Sep
-13
Nov
-13
Jan-
14
Mar
-14
May
-14
Jul-1
4
Sep
-14
Nov
-14
Jan-
15
Mar
-15
May
-15
Jul-1
5
Sep
-15
Nov
-15
Jan-
16
02013 2014 2015 2016
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
19
The chart is shown for illustrative purposes only.
When rates normalize how will my portfolio perform?
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
20
Historical rising rate environments
STRICTLY PRIVATE/CONFIDENTIAL
10.00 2 Year Treasury Yield 5 year Treasury Yield Fed Funds Target Rate
Historical rising rate environmentsTreasury Yields and Fed Funds Rate, %
6.00
7.00
8.00
9.00
3.00
4.00
5.00
-
1.00
2.00
n-90
ul-9
0ec
-90
ay-9
1ct
-91
ar-9
2g-
92n-
93n-
93ov
-93
pr-9
4p-
94b-
95ul
-95
ec-9
5ay
-96
ct-9
6ar
-97
g-97
n-98
n-98
ov-9
8pr
-99
p-99
b-00
ul-0
0ec
-00
ay-0
1ct
-01
ar-0
2g-
02n-
03n-
03ov
-03
pr-0
4p-
04b-
05ul
-05
ec-0
5ay
-06
ct-0
6ar
-07
g-07
n-08
n-08
ov-0
8pr
-09
p-09
b-10
ul-1
0ec
-10
ay-1
1ct
-11
ar-1
2g-
12n-
13
Ja J u De
Ma Oc
Ma
Au Ja Ju No Ap
Se Fe Ju De
Ma Oc
Ma
Au Ja Ju No Ap
Se Fe Ju De
Ma Oc
Ma
Au Ja Ju No Ap
Se Fe Ju De
Ma Oc
Ma
Au Ja Ju No Ap
Se Fe Ju De
Ma Oc
Ma
Au Ja
BofA Merrill Lynch 1-5 Gov/Corp Index 1993 1994 2004 2005 2006 2012
Price Return (%) 0.43 -6.77 -2.26 -2.69 -0.45 -0.03Income Return (%) 6.70 6.21 4.03 4.14 4.69 2.50
Source: Bloomberg. Data as of February 28, 2013.Shaded areas represent rising rate periods
Total Return (%) 7.13 -0.56 1.77 1.45 4.24 2.47
YTM (%) 4.62 7.82 3.42 3.95 2.93 0.69
FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
21
Shaded areas represent rising rate periods.
Fund flows when the Fed turns: 1993 – 1994 fed funds rate +250 bps
8%9%6%
Fed Funds Target 5 Year U.S. Treasury Yield
Fund flows when the Fed turns: 1993 – 1994 fed funds rate +250 bps
Target Rate
Fed Funds Target and 5 Year Treasury Yield
Yield
3%4%5%6%7%8%
2%
3%
4%
5%Fed Funds Target 5 Year U.S. Treasury Yield
0%1%2%
0%
1%
1993 1994
M t l F d d ETF Fi d I Fl 1993 M t l F d d ETF Fi d I Fl 1994
$15 000
$20,000
$25,000
MunicipalsHigh Yield and Bank Loans$15 000
$20,000
$25,000
MunicipalsHigh Yield and Bank Loans
Mutual Fund and ETF Fixed Income Flows 1993
5 Year UST Yield:6.0% 5.2% ( -83bps)
Mutual Fund and ETF Fixed Income Flows 1994
Millions Millions 5 Year UST Yield:5.2% 7.8% ( +263bps)
-$5,000
$0
$5,000
$10,000
$15,000GovernmentsMultisector and Absolute Return
$10 000
-$5,000
$0
$5,000
$10,000
$15,000GovernmentsMultisector and Absolute Return
-$25,000
-$20,000
-$15,000
-$10,000
-$25,000
-$20,000
-$15,000
-$10,000
Source (Top): Bloomberg March 2013 Source (Bottom): Morningstar US Open end ETF and MM Flows as of February 2013 Data includes equity and bond mutual funds and ETF flows
Note: Data begins February 19931993 1994
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22
Source (Top): Bloomberg March 2013. Source (Bottom): Morningstar, US Open-end, ETF, and MM Flows as of February 2013. Data includes equity and bond mutual funds and ETF flows.
Today there is less of a coupon cushion to offset a negative price moveToday there is less of a coupon cushion to offset a negative price move
9%15% P i R t C R t YTM
Coupon vs. Price Returns: BofA ML 1-5 Yr US Gov/Corp Index
Returns YTM
7.62%7.82%
8%
9%
10%
15% Price Return Coupon Return YTM
5 42%
5.20%
5 42%
6.05% 5.83%
6.59%
5.82%6%
7%
5%5.42%
4.62%
5.42%
4.97%4.00%
3.42%
3.95%4%
5%
0%
2.50% 2.45%
2.93%
2.07%
2.07%
2%
3%
-5%
1.37% 1.37%1.08%
0.69%
0%
1%
-10%90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Bloomberg BofA Merrill Lynch Indices
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23
Source: Bloomberg, BofA Merrill Lynch Indices
Estimated effect of rising rates on the sample portfoliosEstimated effect of rising rates on the sample portfolios From 5/31/04 to 6/30/06, interest rates rose approximately 200 bps
If rates rose the same amount over the next two years, assuming a linear upward move, we could see the following:
2.0
2.5
3.0Yield (%)
2.0
2.5
3.0
Yield (%)
0.5
1.0
1.5
0.5
1.0
1.5
2.0
Managed Reserves (A minimum rating)
As of March 1, 2013: Starting Yield 0.47%, Duration 0.72 years
Short Duration Portfolio (A minimum rating)
As of March 1, 2013: Starting Yield 0.80%, Duration 2.60 years
0.0March 2013 March 2014 March 2015
0.0March 2013 March 2014 March 2015
As of March 1, 2013: Starting Yield 0.47%, Duration 0.72 years As of March 1, 2013: Starting Yield 0.80%, Duration 2.60 years
Rate Shift over 2yrs Yield Return % Price Return Total Return (% Market Value)
200 2.86% -1.43% 1.43%150 2.38% -1.07% 1.31%100 1.90% -0.71% 1.18%
Rate Shift over 2yrs Yield Return % Price Return Total Return (% Market Value)
200 3.52% -5.19% -1.67%150 3.04% -3.90% -0.86%100 2.56% -2.60% -0.04%
Data as of March 1, 2013The above is shown for illustrative purposes only These figures are subject to change based on market conditions
50 1.42% -0.35% 1.06%- 0.94% 0.00% 0.94%(50) 0.46% 0.36% 0.82%
50 2.08% -1.30% 0.78%- 1.60% 0.01% 1.61%(50) 1.12% 1.33% 2.45%
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24
The above is shown for illustrative purposes only. These figures are subject to change based on market conditions.
Which way are credit spreads headed?
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25
Yields are at historic lows but spreads are notAs of March 31, 2013BofA Merrill Lynch 1-5 Year Corporate
OAS (bps) Yield (%)
Yields are at historic lows but spreads are not
6
7
8
9
10
500
600
700
800OAS Yield to Worst
1
2
3
4
5
100
200
300
400
00
Oct
-94
Mar
-95
Aug-
95
Jan-
96
Jun-
96
Nov
-96
Apr
-97
Sep-
97
Feb-
98Ju
l-98
Dec
-98
May
-99
Oct
-99
Mar
-00
Aug
-00
Jan-
01Ju
n-01
Nov
-01
Apr
-02
Sep-
02
Feb-
03Ju
l-03
Dec
-03
May
-04
Oct
-04
Mar
-05
Aug
-05
Jan-
06Ju
n-06
Nov
-06
Apr
-07
Sep-
07
Feb-
08Ju
l-08
Dec
-08
May
-09
Oct
-09
Mar
-10
Aug
-10
Jan-
11Ju
n-11
Nov
-11
Apr
-12
Sep-
12
Feb-
13
BofA Merrill Lynch Corporate
1-5 yearYTD 2012
Total Return 6.59%
P i R t 2 37%
BofA Merrill Lynch Corporate
1-5 yearYTD 2012
Total Return 6.59%
Fi i l 9 30%
Source: BofA Merrill Lynch Indices. The above graph is shown for illustrative purposes only. Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice
Price Return 2.37%
Coupon Return 4.22%
3-year Treasury Total Return 0.57%
Financials 9.30%
Industrials 4.55%
Utilities 4.56%
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Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice
26
Corporate finances are in good shapeCorporate finances are in good shape
240%$1,600
Corporate Financing GapNonfarm nonfinancial corporate business, billions USD
Total Internal Funds
Total LeverageS&P 500, ratio of total debt to total equity, quarterly
220%
$1,000
$1,200
$1,400
Total Internal Funds
Total Capital Expenditures
Companies must
borrow
180%
200%
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12$400
$600
$800
Companies can fund internally
Average: 173%
160%
7x
8x
9x
Interest Coverage Ratio (EBIT / Net Interest)S&P 500, quarterly
3Q12:7.2x
120%
140%
2
3x
4x
5x
6x
Source: Federal Reserve, Compustat, Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Data are as of 3/31/13.(Top Left): All data is from the Fed’s Flow of Funds tables report Z 1 F 102 lines 9 and 11 Total internal funds equal retained earnings plus depreciation
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12100%
'94 '96 '98 '00 '02 '04 '06 '08 '10 '120x
1x
2x
4Q12 : 108%
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(Top Left): All data is from the Fed s Flow of Funds tables report Z.1, F.102 lines 9 and 11. Total internal funds equal retained earnings plus depreciation.
27
LBO risk is back security selection will be paramount
$168%$115
LBO risk is back, security selection will be paramount
Price $
Dell 5.4% 9/10/2040 Price and Yield Change YTD Dell Equity Price History YTD
Price $Yield
$147%$110
PriceYield
$10
$12
5%
6%
$100
$105Dell stock has rallied over 30%The benchmark Dell
dropped 20 points while yields rose 152 bps
$6
$8
3%
4%
$90
$95
$2
$4
1%
2%
$80
$85
$0
$2
12/31/2012 1/31/2013 3/3/20130%
1%
$75
$80
12/31/2012 1/31/2013 3/3/2013
Source: Bloomberg as of March 2013Source: Bloomberg as of March 2013
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Source: Bloomberg as of March 2013.Source: Bloomberg as of March 2013.
In summary – what are the issues and opportunities?
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SummarySummary
Foreign Central Banks have driven down interest rates and flooded the system with liquidity Foreign Central Banks have driven down interest rates and flooded the system with liquidity
The search for yield has forced investors into higher yielding investments narrowing credit spreads
Corporate treasurers are looking to put more money out the curve as cash balances grow and the need for moreCorporate treasurers are looking to put more money out the curve as cash balances grow and the need for more yield increases, diversification and cash forecasting remains critical
Floating rate NAVs are likely to be imposed on prime money market funds
We do not think interest rates are headed higher anytime soon
With interest rates low there is little cushion to offset any rise in interest rates
W i t ti dit d We remain constructive on credit spreads
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J P Morgan Asset ManagementJ.P. Morgan Asset ManagementFor Professional/ Institutional Clients only – not for Retail use or distribution.
This document has been produced for information purposes only and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P.Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated J P Morgan Asset Management’s own at the date of this document They are considered to be reliable at the time of writing may not necessarily be all inclusive and are not guaranteed as to accuracy They may be subject to change withoutstated, J.P. Morgan Asset Management s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. Both past performance and yield may not be a reliable guide to future performance and you should be aware that the value of securities and any income arising from them may fluctuate in accordance with market conditions. There is no guarantee that any forecast made will come to pass.
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