Fixed Income Investment Strategies in a Rising …...Bond Prices & Interest Rates This presentation is for Institutional Investors Only – Not for Public Distribution 4 Risks Associated

5502 N NebraskaAveTampa, FL 33604

WaterWalkerInvestments.com

PresentedBy:

Brent Wertz, Managing Partner(813) [email protected]

David Jang, PartnerClient Advisory Services(407) [email protected]

June 14, 2018

Fixed Income Investment Strategies in a Rising Interest Rate Environment

This presentation is for Institutional Investors Only – Not for Public Distribution

Fixed Income Investment Strategies in a Rising Interest Rate Environment

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Agenda

• Market Update• Bond Prices & Risks• Review of the Change of Term Structure• Rates Outlook

• Historic Performance• Long End of the Curve Rises• Short End of the Curve Rises

• Effective Strategies in Rising Rate Environment• Credit Quality Swap• Ladder• Barbell

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Inverse Relationship of Bond Prices & Interest Rates

This presentation is for Institutional Investors Only – Not for Public Distribution4

Risks Associated with Bonds

• Duration Risk - sensitivity of a bond’s price to a percentage change in interest rates.

• Interest Rate Risk - changes in interest rates (in the U.S. or other world markets) may reduce (orincrease) the market value of a bond.

• Call Risk - Issuer often calls a bond when interest rates drop, allowing the issuer to sell new bondspaying lower interest rates.

• Extension Risk - The risk of a callable bond’s expected maturity lengthening is known asextension risk.

• Reinvestment risk - With a callable bond, you might not receive the bond's original coupon rate forthe entire term of the bond

• Default Risk - chance that companies or individuals will be unable to make the required paymentson their debt obligations.

This presentation is for Institutional Investors Only – Not for Public Distribution5

Current Market Conditions

• Market expects the Federal Reserve to raise short term rates 3 to 4 times over thenext 12 months

• The Yield curve continues to flatten and we have seen more of a parallel shift onthe front end of the curve based upon Fed activity over the last 9 months

• Spreads are till very tight – near historical lows – relative value in the market placeis more difficult to find


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Expected Funds Rate Hikes are Below Fed Forecasts

How far and fast will U.S. interest rates move?

Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.Source: Morgan Stanley Research, Bloomberg, Federal Reserve Board

Employment SituationDecember 31, 2013 – March 31, 2018Unemployment Rate (%)

Core PCE, Excluding Food & EnergyDecember 31, 2014 – December 30, 2018Core PCE (%)Participation Rate (%)

Actual Morgan Stanley Forecast (4Q16E – 4Q18E)Fed Target Rate

Bloomberg U.S. Financial Conditions Index December 31, 2015 – March 31, 2018(%)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

1.21.41.61.82.02.2

Dec-14 Sep-15 Jun-16 Mar-17 Dec-17 Sep-1862.0

62.5

63.0

63.5

4.0

5.0

6.0

7.0

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17Unemployment Rate Participation Rate

U.S. Monetary Policy


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Changes in the Shape of the Treasury Curve


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Change in U.S. Treasury Yields

Maturity 5/31/2018 9/30/2017

Change in Rates Since Sep-17

5/31/2017

Change in Rates Over Past Year

Change in Rates from May 2017 -

Sep 17 5/31/2016

Change in Rates Over Past 2 Years

3-Month 1.90% 1.05% 0.85% 0.97% 0.93% 0.08% 0.28% 1.62%6-Month 2.08% 1.19% 0.89% 1.07% 1.01% 0.13% 0.43% 1.65%1-Year 2.23% 1.29% 0.93% 1.15% 1.07% 0.14% 0.59% 1.64%2-Year 2.43% 1.49% 0.94% 1.28% 1.15% 0.20% 0.76% 1.67%5-Year 2.70% 1.94% 0.76% 1.75% 0.95% 0.19% 1.15% 1.55%7-Year 2.81% 2.17% 0.64% 2.02% 0.79% 0.15% 1.42% 1.38%10-Year 2.86% 2.33% 0.53% 2.20% 0.66% 0.13% 1.60% 1.26%30-Year 3.03% 2.86% 0.17% 2.86% 0.16% 0.00% 2.32% 0.71%


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Change in (UST, US Agency & Corp) Curves from 9/30/17 to 5/31/18


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How Have Spreads Changed in With Agencies & AA Corps

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U.S. Treasury U.S. Agency U.S. AA Corps U.S. Agency U.S. AA Corps

1-Year 2.23% 2.14% 2.47% -0.09% 0.25%2-Year 2.43% 2.45% 2.74% 0.02% 0.31%3-Year 2.55% 2.63% 2.91% 0.08% 0.35%5-Year 2.70% 2.75% 3.17% 0.05% 0.47%10-Year 2.86% 3.19% 3.66% 0.33% 0.80%

MaturiyYields as of May 31, 2018 Spreads to U.S. Treasury

U.S. Treasury U.S. Agency U.S. AA Corps U.S. Agency U.S. AA Corps

1-Year 1.29% 1.30% 1.51% 0.00% 0.21%2-Year 1.49% 1.53% 1.75% 0.04% 0.26%3-Year 1.62% 1.64% 1.96% 0.02% 0.34%5-Year 1.94% 1.81% 2.33% -0.12% 0.39%10-Year 2.33% 2.75% 3.06% 0.41% 0.73%

Spread to U.S. TreasuryMaturiy

Yields as of Sept. 30, 2017

1-Year -0.085% 0.004% -0.089% 0.245% 0.211% 0.034%2-Year 0.016% 0.044% -0.028% 0.307% 0.263% 0.044%3-Year 0.082% 0.019% 0.063% 0.353% 0.340% 0.013%5-Year 0.050% -0.123% 0.173% 0.474% 0.394% 0.080%10-Year 0.327% 0.411% -0.084% 0.798% 0.727% 0.071%

Changein Spreads

Since 9/30/17U.S. AA Corps

5/31/18U.S. AA Corps

9/30/17Maturity U.S. Agency

5/31/18U.S. Agency

9/30/17

Spreads to UST Changein Spreads

Since 9/30/17

Spreads to UST


US Corporate Index Spread by rating


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US Corporate Index Spread (Last 10 Years)


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Historical Performance: Long Term Interest Rates Rise

• What fixed income securities historically have done well duringrising long term Treasury Yields?

• Examples:• Short term corporate bonds

• High yield corporate bonds

• Floating rate bank notes

• Convertible bonds

• Lower duration and more credit sensitive bonds


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Historical Performance

Period10-Year

U.S.Treasury1

BloombergBarclays

Aggregate2

IG CorporateFloating

Rate Notes3

Short-Term Corporates4

Floating RateLoans5

High-YieldBonds6

GlobalHigh Yield7

ConvertibleBonds8 S&P 5009

09/30/1993 -11/30/1994 -8.90% -3.00% N / A 2.10% 11.30% 1.20% N / A -2.70% 1.80%

01/31/1996 -08/31/1996 -6.00% -1.80% N / A 1.70% 4.80% 3.10% N / A 5.40% 3.90%

09/30/1998 -01/31/2000 -7.70% -0.60% N / A 4.20% 4.90% 3.70% 5.16% 41.40% 28.30%

06/30/2005 -06/30/2006 -5.80% -0.80% 4.60% 2.30% 6.70% 4.70% 5.92% 9.40% 8.60%

12/31/2008 -12/31/2009 -9.90% 5.90% 8.80% 21.30% 44.90% 57.50% 61.98% 49.10% 26.50%

08/31/2010 -03/31/2011 -6.10% -0.80% 1.60% 2.30% 7.40% 10.30% 11.57% 19.20% 27.80%

07/31/2012 -12/31/2013 -6.20% -1.10% 1.80% 3.20% 7.00% 9.50% 17.50% 22.90% 25.70%

06/30/2016 -12/31/2016 -7.50% -2.50% 1.20% 0.60% 5.40% 7.50% 5.70% 8.30% 8.10%


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Historical Performance as the Fed Raises short Term Rates

• What fixed income securities historically have done well when the Federal Reserveraises short term interest rates?

• US Treasury bonds have generated positive returns

• Short term Corporates

• Short term CMBS

• Floating rate securities


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Historical Performance

PeriodBloomberg

BarclaysAggregate1

2-YearU.S.

Treasury2

10-YearU.S.

Treasury3

Short-TermCorporate4

Short-TermCMBS5

Short-TermABS6

IG CorporateFloating

Rate Notes7

FloatingRate Loans8

12/15/1986-09/04/1987 -0.40% 2.45% -6.32% 3.12% N / A N / A N / A N / A

03/28/1988-02/24/1989 3.41% 4.13% 2.47% 5.73% N / A N / A N / A N / A

02/03/1994-02/01/1995 -2.04% 1.16% -7.11% 1.69% N / A N / A N / A 9.33%

06/29/1999-05/16/2000 2.02% 2.81% -0.25% 3.48% 3.46% 4.53% N / A 3.06%

06/29/2004-06/29/2006 2.99% 1.51% 1.87% 2.42% 2.41% 2.88% 3.51% 5.92%

12/15/2015-12/20/2017 2.77% 0.37% 0.58% 2.10% 1.50% 1.61% 2.06% 7.04%


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Strategies to Implement during Rising Rate Environments

• Credit Quality Strategies• Sell High Quality / Buy Lower Quality

• Interest Rate Anticipation Strategies• Shorten Duration – Cushion Bonds / Limit Extension Risk / Positive

Convexity

• Yield Curve Strategies• Selective with duration on the Curve (take advantage of relative value)


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Credit Rating Trend

Source: Morningstar


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Historical OAS Spreads in Credit Market

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Credit Quality Swaps

• Strategy to allocate more tolower quality bonds and less tohigher quality bonds

• As economy improves theexpectation is lower qualitycredits improve and possibleupgrade

• Expect Economic Expansion• Long in lower quality bonds• Short in higher quality bonds

Credit

5/31/2018Spreads vsGov'ts (bp)

9/30/2017Spreads vsGov'ts (bp)

Change in Spread (bp)

AAA 37 59 -22AA 50 64 -14A 66 84 -18

BBB 103 137 -34


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Interest Rate Anticipation Strategy

• Process of analyzing and forecasting the trend of interest rates and thenestablishing an average term to maturity for the bond portfolio

• Anticipation of rising interest rates would dictate shortening the average term tomaturity

• Declining interest rates would likely provide the greatest opportunity at the longend of the market.

• Essentially making a market call on where rates are headed and can be risky ifyour interest rate forecast is incorrect.


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Interest Rate Anticipation Strategy

Source: Ferguson Johnson Wealth Management – Failure to Project Interest Rate Forecasts


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Interest Rate Anticipation

• Interest rate anticipation swaps are effective when rates are expected to increaseacross all maturities

• Strategy: Shorten the portfolio’s duration: Sell higher duration bonds and buylower duration ones.

• Defensive Strategy: Objective is to preserve the value of a bond fund and usedefensive securities such as floaters both SBA and high grade corporatefloaters, utilize short duration securities that generate cash flow so the cashflows can be reinvested at higher rates.

maturitiesallacrossPandRExpect B

0 ↓∴↑ Short in high duration bondsLong in low duration bonds


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Yield curve Strategies

The bullet strategy is formed by constructing a portfolio concentrated in one maturity area.

The barbell strategy is formed with investments concentrated in both short-term and long-term bonds.

The ladder strategy is formed with equally allocated investments in each maturity group.


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Climbing the Ladder when Interest Rates Rise

• The ladder strategy is formed withequally allocated investments in eachmaturity or duration group.

• Maturing proceeds are reinvested on thelonger end of the curve appropriate forthe portfolio


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Climbing The Bond Ladder


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Barbell Investment Portfolio Strategy

• A balanced or unbalanced portfolio of shortand long term maturities.

• A bond investment strategy in which thematurities of the securities included in theportfolio are concentrated at two extremes.

• The strategy involves only selecting securitieswith short and long term maturities.

• The maturity structure of the portfolio can belengthened or shortened by varying the amount oneither end of the maturity range.


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Example of Barbell Strategy • This strategy involves buying short or floating rate bonds in conjunction with longer bonds

• The short positions alleviate risk from possible FOMC rate hikes• The long bonds are positioned along curve to increase portfolio yield & offer roll down value

• The strategy involves equal allocations to the following securities:

• SBA floaters (par) are uncapped, have 0% risk-weighting and offer floating rate yields about 40-50 bps above Fed Funds. The par priceeliminates any premium risk from faster pay downs.

• Corporate floaters are also uncapped. There is a very attractive spread on A rated and higher credits in relatively shortmaturities. Currently an A rated floater provides roughly 100bps or more to Fed Fund rates.

• CMOs – Intermediate 2-4 durations offer yields in the 3 -3.50% yield range with very heavy front end cash flow.

• FNMA MBS DUS – 5-7 year range offers one of the steepest parts of the curve and DUS has zero extension risk (positively convex) dueto the balloon maturities which provides cash flow stability.

Corporate Floaters, 25%

CMO, 25%SBA Floaters, 25%

FNMA MBS DUS, 25%


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Example of Barbell Strategy

• Price Sensitivity is low due to limited extension risk & floating securities• Scenario Analysis – 12 month Bear Flatteners w (2 Yr UST rising to 3.04%, 10 Yr UST rising to 3.12%)• Total Return – 12 month Bear Flattener is 2.56% (price return = -0.58% + income return 3.13%)


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Why Barbell?

• A valuable attribute is it typically outperforms most other investment strategies in steep, flat or parallelrate environments.

• If the FOMC sticks to its aggressive dot plot forecast then the floaters will protect the portfolio.

• If FOMC is not as aggressive then the CMOs and call protected DUS will roll down the curve nicely.

• A barbell strategy can be tailored to any interest rate risk need by altering the duration and convexityprofile on either end of the combination


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Questions


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DisclosuresThis presentation is only intended for institutional and/or sophisticated professional investors. This material is intended for informational purposes only and should not be relied upon to make an investment decision, as it was prepared without regard to any specific objectives, or financial circumstances. It should not be construed as an offer or to purchase/sell any investment. Any investment or strategy referenced may involve significant risks, including, but not limited to: risk of loss, illiquidity, unavailability within all jurisdictions, and may not be suitable for all investors. To the extent permitted by applicable law, no member of Water Walker Investments Team and/or Florida Fixed Income Trust or any officer, employee or associate accepts any liability whatsoever for any direct or consequential loss arising from any use of this presentation or its contents, including for negligence. This material is not intended for distribution to, or use by, any person in a jurisdiction where delivery would be contrary to applicable law or regulation, or it is subject to any contractual restriction. No further distribution is permissible without prior written consent.

The views expressed within this material constitute the perspective and judgment of Water Walker Investmentsand/or Florida Fixed Income Trust at the time of distribution and are subject to change. Any forecast, projection, or prediction of the market, the economy, economic trends, and equity or fixed-income markets are based upon current opinion as of the date of issue, and are also subject to change. Opinions and data presented are not necessarily indicative of future events or expected performance. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. No representation is made as to its accuracy or completeness.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted.


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Documents

Fixed Income Investment Strategies in a Rising …...Bond Prices & Interest Rates This presentation is for Institutional Investors Only – Not for Public Distribution 4 Risks Associated