Currently in Cash: A focus on investment trends April 2013

New York February 2–3, 2011

J.P. Morgan Asset Management

FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION

Currently in Cash: A focus on investment trendsApril 2013

Kent Christian, Executive Director, Client Portfolio Manager, U.S. Short Term Fixed Income [email protected]

212 648 2703

Thomas Metzler, Managing Director, Head of Americas Corporate Sales Team for J.P. Morgan Global [email protected]

212 622 3137


Overview

Foreign central banks have flooded the markets with liquidity

What are corporate treasurers doing now?

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?

Which way are credit spreads heading?

In summary – what are the issues and opportunities?

2


Foreign central banks have flooded the markets with liquidity

3


Source: Bloomberg. Data as of February 28, 2013.

Bond markets reflect a global monetary experiment

4

Unprecedented Central Bank Intervention… …Has Driven Down Developed Market Yields…Size of central bank balance sheet (in Millions of USD) US & German 2 Year Yields (%)

Source: Bloomberg, JPMSI. Data as of March 27, 2013

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

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Federal Reserve

Bank of Japan

Bank of England

European Central Bank

Japanese 2 Year Yields (%)

Dec

-99

Jul-0

0Ja

n-01

Jul-0

1Ja

n-02

Jul-0

2Ja

n-03

Jul-0

3Ja

n-04

Jul-0

4Ja

n-05

Jul-0

5Ja

n-06

Jul-0

6Ja

n-07

Jul-0

7Ja

n-08

Jul-0

8Ja

n-09

Jul-0

9Ja

n-10

Jul-1

0Ja

n-11

Jul-1

1Ja

n-12

Jul-1

2Ja

n-13

-1

0

1

2

3

4

5

6

7

0.0

0.2

0.4

0.6

0.8

1.0

1.2US 2 Year RatesGerman 2 Year RatesJapanese 2 Year Rates


Mutual fund flows show money moving out of stocks and money market funds and into bond funds

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 allocation, balanced fund, flexible fund, flexible portfolio and mixed income flows. Data are as of 3/31/13.

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 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) 375 159 194

5

-$20,000

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000Municipals

High Yield and Bank Loans

Governments

Intermediate Term

Long Term

Multisector and Absolute Return

+$53 Bln+$46 Bln

-$0.637 Bln

+$129 Bln

+$18 Bln+$28 Bln

Source: Morningstar, US Open-end, ETF, and MM Flows as of February 2013.

Mutual Fund and ETF Fixed Income Flows for 2012

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

'07 '08 '09 '10 '11 '12 '13

Bonds

Stocks

Cumulative Flows into Stock & Bond FundsIncludes both mutual funds and ETFs, $ billions

Feb. ’13: $1,447 billion into bond funds and fixed income ETFs since ’07

Feb. ’13: $278 billion into stock funds and equity ETFs since ’07


Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

0

100

200

300

400

500

600

700

800

Strong technicals and good fundamentals have driven spreads and yields lower

6

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

As February 28, 2013

Average spread 12/31/02 – 8/31/07:

56 bps

Option Adjusted Spread (bps)BofA Merrill Lynch 1-5 Year Corporate A and above

Average spread 12/31/09 – 2/28/13:

128 bps

Yield (%)BofA Merrill Lynch 1-5 Year Corporate A and above

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

0

1

2

3

4

5

6

7

8

9


What are corporate treasurers doing now?

7


Segmenting liquidity needs for return optimization

8

Risk ProfileTotal balance sheet cash

The above chart is for illustrative purposes only.

Operating

Cash typically used for daily operating needs may be subject to unforeseen volatility

Requires preservation of principal

Late-day access Same-day liquidity

Reserve

Investment horizon of six to nine months or longer

Fairly static, same-day access not needed

Cash set aside for possible acquisition, stock buy back or R&D

Strategiccash

Restrictedcash

Operatingcash

Reservecash

Restricted

Balances trapped in highly regulated jurisdictions or with repatriation-related tax issues

Cash collateral tied to credit agreements or derivative contracts

Strategic

No short-term forecasted use

Cash on balance sheet that has not been historically used

Investment horizon of one year or longer


Deploying corporate cash

9

$20

$40

$60

$80

$100

$120

$140

$160

$15

$18

$21

$24

$27

$30

$33

'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 '1220%

30%

40%

50%

60%

Corporate Cash as a % of Current Assets

Cash Returned to ShareholdersDividend Payout Ratio

S&P 500 companies – cash and cash equivalents, quarterly

S&P 500 companies, rolling 4-quarter averages, billions USD

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 Asse t Management. (Bottom right) Standard & Poor’s, Compustat , FactSet, J.P. Morgan Asset Management. Data are as of 3/31/13.

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '1214%

16%

18%

20%

22%

24%

26%

28%

30%

Corporate Growth

Capital Expenditures M&A Activity

$bn, nonfarm nonfinancial capex, quarterly value of deals completed

S&P 500 companies, LTM

Dividends per Share

Share Buybacks

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12


Strategies with more yield are attracting corporate cash

10

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 current market conditions constitute our judgment and are subject to change without notice

Money Market Fund AUM ($)

300,000,000,000

350,000,000,000

400,000,000,000

450,000,000,000

500,000,000,000

550,000,000,000

600,000,000,000

0

5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

35,000,000,000

40,000,000,000

45,000,000,000JPMorgan Money Market Funds Managed Reserves Short Duration

Managed Reserves & Short Duration AUM ($)


After narrowing dramatically, yield spreads among strategies appear to have stabilized

11

Source: JPMorgan Asset Management. Data as of March 20, 2013Past performance is not indicative of future results.

Yield (%)

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

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8Liquidity Managed Reserves Short Duration 1-5 Years


What are the options today?

12

Type of Portfolio Credit Quality Minimum Duration (yrs) Average Market

Yield (%)

Government Money Market A-1+ 0.1 0.16

Credit Money Market A-1 0.1 0.26

Managed Reserves A 0.72 0.43

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.


Regulatory reform – what is the potential impact for investors?

13

FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION14

Floating NAV

U.S.Stable NAV with “buffer” and

minimum balance at risk

Stable NAV with “buffer” and other measures

The FSOC proposed three alternatives in November 2012

Investors value a stable NAV more than additional yield. Cash moves from Prime Funds into Government Funds

Supply/demand imbalance may occur as demand for short Treasuries, Agencies, and Repo backed by Treasuries and/or Agencies increases.

Yields on short Treasuries and Agencies may fall.

Spread between Treasuries/ Agencies and “credit” widen → yield differential between Gov’t and Credit MMF’s may widen.

Demand may increase for separate accounts?

─ Customization / Control

─ Search for Yield

Potential for greater use of bank deposits

Current Situation Possible SEC Proposal(s) Potential Impact

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).

Prime Funds = Floating NAV

Treasury & Agency Funds = Stable NAV

Muni Funds = Stable NAV ?

Concerns will remain around tax and accounting issues until a firm

ruling is made.

• 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.

After significant reform in 2010, regulators are committed to additional

reform

Money market fund regulation: Where are we going and what does it mean?


15

Interest rates are low, but will they head higher soon?


Base Case (80%): Sub Trend Recovery continues through 2013– GDP 0-3%; Inflation 1-3%– For the fifth consecutive year, we are forecasting below trend growth in

developed and emerging economies– Positives for global GDP include: the recovery in U.S. housing,

bottoming of growth in China & Brazil, and averting a serious recession in Europe due to austerity fatigue. Continuing central bank debt monetization also improves markets for financial assets, and hence, funding

– Headwinds to growth include fiscal drag in the U.S., official restraint of the property sector in China, and continuing imbalances between northern and southern Europe

– High yield, local emerging market debt and IG financials are the team’s favorite 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 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 than expected EM growth

– Fears that QE3 will end during 2013 cause government bond yields to rise sharply throughout the world

– Investors concerned about a growth scare favored shorting Treasuries and going long EMFX to benefit from global rebalancing

Macro scenario probabilities & investment expectations: 2Q13

16

ContractionExpansion

Recession (5%) – 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 negative feedback loop

– Government bonds yields have risen sufficiently to offer attractive returns in this scenario

Crisis (5%)– The most likely tail event is geopolitical (MENA, East Asia)– 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

scenario likely

Stagflation (0%)– 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 best

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 without notice. There can be no guarantee they will be met.


In spite of massive fiscal and monetary stimulus GDP growth remains below trend

17

Size of Fed’s balance sheet ($ Millions)

U.S. GDP Quarterly (% Annualized)

Source: Bloomberg. As of March 28, 2013

Trend GDP

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

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

-10

-8

-6

-4

-2

0

2

4

6

8

10

Federal Reserve Balance Sheet US GDP Quarterly (Annualized)


Interest rates can stay low for a long time

10-year Government Bond Rates (%)

18

Jan-

95M

ay-9

5S

ep-9

5Ja

n-96

May

-96

Sep

-96

Jan-

97M

ay-9

7S

ep-9

7Ja

n-98

May

-98

Sep

-98

Jan-

99M

ay-9

9S

ep-9

9Ja

n-00

May

-00

Sep

-00

Jan-

01M

ay-0

1S

ep-0

1Ja

n-02

May

-02

Sep

-02

Jan-

03M

ay-0

3S

ep-0

3Ja

n-04

May

-04

Sep

-04

Jan-

05M

ay-0

5S

ep-0

5Ja

n-06

May

-06

Sep

-06

Jan-

07M

ay-0

7S

ep-0

7Ja

n-08

May

-08

Sep

-08

Jan-

09M

ay-0

9S

ep-0

9Ja

n-10

May

-10

Sep

-10

Jan-

11M

ay-1

1S

ep-1

1Ja

n-12

May

-12

Sep

-12

Jan-

13

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Japanese 10-year Rates US, UK, Germany 10-year Rates equally weighted: starting June 2008

Source: JPMSI. Data as of March 31, 2013. The chart is shown for illustrative purposes only.


Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

4

5

6

7

8

9

10

When will the Fed end its zero interest rate policy?

19

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.

U.S. Unemployment Rate (%)

7.6%

6.5

U.S. Labor Force Participation Rate (%)

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-1363

64

65

66

63.3%


When does the market expect interest rates to rise?

Fed Funds (%)

20

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.

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

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

When does the market expect interest rates to rise?

2013 2014 2015 20160

2

4

6

8

10

12

14

1

4

13

1

Number of Respondents

When does the Fed expect interest rates to rise?

Appropriate Timing of Policy Firming March 2013 FOMC Meeting


When rates normalize how will my portfolio perform?

21


Jan-

90Ju

n-90

Oct

-90

Feb

-91

Jun-

91O

ct-9

1F

eb-9

2Ju

n-92

Oct

-92

Feb

-93

Jun-

93O

ct-9

3F

eb-9

4Ju

n-94

Oct

-94

Feb

-95

Jun-

95O

ct-9

5F

eb-9

6Ju

n-96

Oct

-96

Feb

-97

Jun-

97O

ct-9

7F

eb-9

8Ju

n-98

Oct

-98

Feb

-99

Jun-

99O

ct-9

9F

eb-0

0Ju

n-00

Oct

-00

Feb

-01

Jun-

01O

ct-0

1F

eb-0

2Ju

n-02

Oct

-02

Feb

-03

Jun-

03O

ct-0

3F

eb-0

4Ju

n-04

Oct

-04

Feb

-05

Jun-

05O

ct-0

5F

eb-0

6Ju

n-06

Oct

-06

Feb

-07

Jun-

07O

ct-0

7F

eb-0

8Ju

n-08

Oct

-08

Feb

-09

Jun-

09O

ct-0

9F

eb-1

0Ju

n-10

Oct

-10

Feb

-11

Jun-

11O

ct-1

1F

eb-1

2Ju

n-12

Oct

-12

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00 2 Year Treasury Yield 5 year Treasury Yield Fed Funds Target Rate

Historical rising rate environments

22

Treasury Yields and Fed Funds Rate, %

Source: Bloomberg. Data as of February 28, 2013.Shaded areas represent rising rate periods.

STRICTLY PRIVATE/CONFIDENTIAL

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 2.50Total 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


1993 19940%

1%

2%

3%

4%

5%

6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%Fed Funds Target 5 Year U.S. Treasury Yield

-$25,000

-$20,000

-$15,000

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

MunicipalsHigh Yield and Bank LoansGovernmentsMultisector and Absolute Return

-$25,000

-$20,000

-$15,000

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

MunicipalsHigh Yield and Bank LoansGovernmentsMultisector and Absolute Return

Fund flows when the Fed turns: 1993 – 1994 fed funds rate +250 bps

23

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

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.

Target Rate

Fed Funds Target and 5 Year Treasury Yield

Note: Data begins February 1993

Millions Millions 5 Year UST Yield:5.2% 7.8% ( +263bps)

Yield

1993 1994


Today there is less of a coupon cushion to offset a negative price move

24

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-10%

-5%

0%

5%

10%

15%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

7.62%

5.42%

5.20%

4.62%

7.82%

5.42%

6.05% 5.83%

4.97%

6.59%

5.82%

4.00%

2.50% 2.45%

3.42%

3.95%

2.93%

2.07%

1.37%

2.07%

1.37%1.08%

0.69%

Price Return Coupon Return YTM

Coupon vs. Price Returns: BofA ML 1-5 Yr US Gov/Corp Index

Returns

Source: Bloomberg, BofA Merrill Lynch Indices

YTM


Estimated 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:

25

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

Data as of March 1, 2013The above is shown for illustrative purposes only. These figures are subject to change based on market conditions.

March 2013 March 2014 March 20150.0

0.5

1.0

1.5

2.0

2.5

3.0

Yield (%)

March 2013 March 2014 March 20150.0

0.5

1.0

1.5

2.0

2.5

3.0

Yield (%)

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%50 1.42% -0.35% 1.06%

- 0.94% 0.00% 0.94%(50) 0.46% 0.36% 0.82%

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%50 2.08% -1.30% 0.78%

- 1.60% 0.01% 1.61%(50) 1.12% 1.33% 2.45%


Which way are credit spreads headed?

26


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

As of March 31, 2013BofA Merrill Lynch 1-5 Year Corporate

OAS (bps)

27

BofA Merrill Lynch Corporate 1-5 year

YTD 2012

Total Return 6.59%

Price Return 2.37%

Coupon Return 4.22%

3-year Treasury Total Return 0.57%

BofA Merrill Lynch Corporate 1-5 year

YTD 2012

Total Return 6.59%

Financials 9.30%

Industrials 4.55%

Utilities 4.56%

Oct

-94

Feb-

95Ju

n-95

Oct

-95

Feb-

96Ju

n-96

Oct

-96

Feb-

97Ju

n-97

Oct

-97

Feb-

98Ju

n-98

Oct

-98

Feb-

99Ju

n-99

Oct

-99

Feb-

00Ju

n-00

Oct

-00

Feb-

01Ju

n-01

Oct

-01

Feb-

02Ju

n-02

Oct

-02

Feb-

03Ju

n-03

Oct

-03

Feb-

04Ju

n-04

Oct

-04

Feb-

05Ju

n-05

Oct

-05

Feb-

06Ju

n-06

Oct

-06

Feb-

07Ju

n-07

Oct

-07

Feb-

08Ju

n-08

Oct

-08

Feb-

09Ju

n-09

Oct

-09

Feb-

10Ju

n-10

Oct

-10

Feb-

11Ju

n-11

Oct

-11

Feb-

12Ju

n-12

Oct

-12

Feb-

13

0

100

200

300

400

500

600

700

800

0

1

2

3

4

5

6

7

8

9

10OAS Yield to Worst

Yield (%)

Yields are at historic lows but spreads are not


Corporate finances are in good shape

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.

28

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12100%

120%

140%

160%

180%

200%

220%

240%

'94 '96 '98 '00 '02 '04 '06 '08 '10 '120x

1x

2x

3x

4x

5x

6x

7x

8x

9x

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Corporate Financing GapNonfarm nonfinancial corporate business, billions USD

Total Internal Funds

Total Capital Expenditures

Companies must

borrow

Companies can fund internally

Interest Coverage Ratio (EBIT / Net Interest)S&P 500, quarterly

Total LeverageS&P 500, ratio of total debt to total equity, quarterly

3Q12:7.2x

4Q12 : 108%

Average: 173%


12/31/2012 1/31/2013 3/3/2013$0

$2

$4

$6

$8

$10

$12

$14

$16

$75

$80

$85

$90

$95

$100

$105

$110

0%

1%

2%

3%

4%

5%

6%

7%

8%

PriceYield

Dell stock has rallied over 30%The benchmark Dell dropped 20 points while yields rose 152 bps

LBO risk is back, security selection will be paramount

29

Source: Bloomberg as of March 2013.

Price $

Dell 5.4% 9/10/2040 Price and Yield Change YTD Dell Equity Price History YTD

Price $Yield

Source: Bloomberg as of March 2013.


In summary – what are the issues and opportunities?

30


Summary

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 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

We remain constructive on credit spreads

31

FOR INSTITUTIONAL AND PROFESSIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION32

J.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 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.

Fixed Income Risks: The strategy is subject to management risk and may not achieve its objective if the adviser’s expectations regarding particular securities or markets are not met. The strategy mainly invests in bonds and other debt securities. These securities will increase or decrease in value based on changes in interest rates. If rates increase, the value of the Strategy’s investments generally declines. On the other hand, if rates fall, the value of the investments generally increases. Your investment will decline in value if the value of the investments decreases. Securities with greater interest rate sensitivity and longer maturities tend to produce higher yields, but are subject to greater fluctuations in value. Usually, the changes in the value of fixed income securities will not affect cash income generated, but may affect the value of your investment. The strategy’s investments are subject to the risk that a counterparty will fail to make payments when due or default completely. If an issuer’s financial condition worsens, the credit quality of the issuer may deteriorate making it difficult for the manager to sell such investments. The manager may use derivatives in connection with its investment strategies. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the strategy’s original investments. Certain derivatives may give rise to a form of leverage. As a result, the strategy may be more volatile than if the strategy had not been leveraged because the leverage tends to exaggerate the effect of any increase or decrease in the value of the portfolio’s securities. Derivatives are also subject to the risk that changes in the value of a derivative may not correlate perfectly with the underlying asset, rate or index. The use of derivatives for hedging or risk management purposes or to increase income or gain may not be successful, resulting in losses to a portfolio, and the cost of such strategies may reduce a portfolio’s returns. Derivatives would also expose a portfolio to the credit risk of the derivative counterparty.

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Currently in Cash: A focus on investment trends April 2013