Liquidity Management: Beyond Quantitative Easing · Global Business Cycle in a Trend of Modest Improvement 4 Note: This is a hypothetical illustration of a typical business cycle

Liquidity Management:

Beyond Quantitative Easing

June 2014

For Institutional Use Only

2

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

Agenda


Assessing Risk: Current Market Conditions


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).


Global Debt to GDP Trends


0

50

100

150

200

250

2008 2009 2010 2011 2012 2013

%

Debt as a % of GDP

Eurozone China U.S. Japan

5

Source: www.tradingeconomics.com

Coordinated Global Monetary Policy

6

Source: Bloomberg as of 4/30/14

0.0

1.0

2.0

3.0

4.0

5.0

6.0

%

Federal Reserve European Central Bank Bank of England Bank of Japan


0%

5%

10%

15%

20%

25%

30%

Federal Reserve Assets as a % of GDP

Federal Reserve Bank

Central Banks Resort to Non-Traditional Policy

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.

For Institutional Use Only 7

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Key Central Bank Assets as a % of GDP

European Central Bank Bank of England Bank of Japan

QE1 QE2 QE3

Liquidity From QE Flows into Global Markets

-$100

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

Billi

on

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 For Institutional Use Only

Investors Respond To Bond Bull Market

0

150

300

450

600

750

900

1,050

1,200

1,350

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

$B

illi

on

s

Fixed Income Sector Asset Growth

Intermediate & Long-Term Bond Short-Term Bond Funds Ultrashort Bond Funds

Source: Strategic Insight (Simfund), Morningstar, iMoneynet, and Bloomberg as of 3/31/14


QE Has Driven Bond Yields and Valuations


10

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Yie

ld (

%)

10-Year Government Bond Yields

US UK Germany Japan


Quest For Yield Has Driven Corporate Spreads Lower

11

Source: Barclays as of 4/30/14

0

100

200

300

400

500

600

700

800

Op

tio

n A

dju

ste

d S

pre

ad

(b

ps)

Barclays Credit Index Sub-Sector OAS

Industrials Utilities Financials


QE Has Lead To Higher Equity Valuation


12

50

65

80

95

110

125

140

155

Ind

ex

Va

lue

(In

dex

ed

to

10

0 a

t 6/3

0/0

8)

S&P 500 FTSE 100 DAX Nikkei 225


QE Taper Talks Creates Emerging Market Volatility

13

800

850

900

950

1000

1050

1100

Ind

ex

Va

lue

MSCI Emerging Markets Index Barclays Emerging Markets USD Aggregate Index

Source: Barclays and Bloomberg as of 4/30/14


0

2

4

6

8

10

12

14

16

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

2042

2046

2050

2054

2058

Yie

ld (%

) Rati

o

US Borrowers/Savers 12 Month Rolling Average 10-Year U.S. Treasury Yield

Demographics are an Important Driver of Interest Rates

14

Source: Bloomberg and Haver as of 4/30/14


Roadmap To Higher U.S. Interest Rates


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


Federal Reserve’s Economic Projections

Source: Bloomberg and Federal Reserve

FOMC Forecast as of March 19, 2014 17

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Un

em

plo

ym

en

t R

ate

(%

)

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75P

CE

Yo

Y (

%)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Rea

l G

DP

Yo

Y (

%)

Actual Inflation

Inflation Forecast

Unemployment Rate Forecast Actual Unemployment Rate

Actual GDP GDP Forecast

Inflation Threshold


U.S. Inflation Risks Remain Subdued

18

1.50x

1.55x

1.60x

1.65x

1.70x

1.75x

1.80x

1.85x

1.90x

1.95x

2.00x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Aug-0

7

Feb

-08

Aug-0

8

Feb

-09

Aug-0

9

Feb

-10

Aug-1

0

Feb

-11

Aug-1

1

Feb

-12

Aug-1

2

Feb

-13

Aug-1

3

Feb

-14

Monetary Base Money Velocity

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.

U.S. Monetary Base and Velocity Key Drivers of Inflation

$ Trillions Money Velocity


225

300

375

450

525

600

675

Jo

ble

ss

Cla

ims

(th

ou

sa

nd

s)

Initial Claims Initial Claims, 4-Week Moving Average

Jobless Claims Heading to Pre-Recession Levels

Source: Department of Labor, Bloomberg as of 4/25/14


U.S. Labor Participation Rates Continues Downward Trend

0

1

2

3

4

5

6

7

8

9

10

11

62

63

64

65

66

67

Un

em

plo

ym

en

t R

ate

(%

)

Part

icip

ati

on

Rate

(%

)

Labor Force Participation Rate Unemployment Rate

Source: Bureau of Labor Statistics, Bloomberg as of 4/30/14


Employment Creation Positive, But Not Impressive

Source: Bureau of Labor Statistics, Bloomberg as of 4/30/14

-1000

-800

-600

-400

-200

0

200

400

600

Th

ou

sa

nd

s o

f E

mp

loye

es

m/m Change in Non-Farm Payrolls 6 Month Avg of m/m Chg


80

85

90

95

100

105

110

115

-6 -5.5-5.0-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6

Years Before/After Start of Recession

Post Recession U.S. Employment Recovery’s

22

Employment: Pre and Post Recession

Source: NBER, BLS/Haver as of 2/28/14. Data represents Civilian Employment (SA, Thous).

Most Recent

Recession

Em

plo

yment Level In

dexed to 1

00 a

t S

tart

of R

ecessio

n


Lackluster GDP Growth Despite Historic Fed Policy

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

%

Net Exports Government Investment Consumption Total

Contributions to Real GDP (% change annualized)

Source: Bureau of Economic Analysis as of 3/31/14


Potential Headwinds for GDP

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.$

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

% C

han

ge

Y

oY

US Personal Consumption Expenditures

US Personal Income

24

50

55

60

65

70

75

80

85

90

Ind

ex

Leve

l

U. of Michigan Survey of Consumer Confidence Sentiment


Higher Mortgage Rates Could Dampen Recovery

Source: Bankrate.com, Mortgage Bankers Association, Bloomberg as of 4/25/14

Note: 30-year mortgage rate represents the overnight national average.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Refi

na

nce

In

de

x V

alu

e

30

-Ye

ar

Fix

ed

Ra

te (

%)

30-Year Fixed Mortgage Rate vs. Refinance Index


Impact To US Liquidity Managers


Consensus Builds for a 2015 Rate Hike

27

Source: Federal Reserve as of 3/19/14

Federal Reserve Board Rate Expectations

Appropriate Pace of Policy Firming

(March 2014)


3

12

2 2

12

3

1

13

2

2014 2015 2016

Nu

mb

er

of

Part

icip

an

ts

Appropriate Timing of Policy Firming

Sep-2013 Dec-2013 Mar-2014

Fed Meeting Date 2015 2016 Longer Run

Mar-2014 1.00 2.25 4.00

Dec-2013 0.75 1.75 4.00

Median Target Fed Funds Rate at Year End

Q/E Tapering Expectations and Timing of First Rate Hike

28

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Jul-13

Au

g-1

3

Se

p-1

3

Oct-

13

No

v-1

3

De

c-1

3

Ja

n-1

4

Feb

-14

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Ju

n-1

4

Ju

l-1

4

Au

g-1

4

Se

p-1

4

Oct-

14

No

v-1

4

De

c-1

4

Ja

n-1

5

Feb-1

5

Ma

r-1

5

Ap

r-1

5

Ma

y-1

5

Jun-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Ja

n-1

6

Feb

-16

Ma

r-1

6

Ap

r-1

6

%

Forward Fed Funds Futures


Sep-13

May-13


Apr-14

Liquidity Strategies Risk Profiles

29 For Institutional Client Use Only

• 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.

Attribute Portfolio 1 Portfolio 2 Portfolio 3

OAD (Months) 3 6 12

Spread Duration 6 12 18

Yield 0.39% 0.56% 0.82%

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



Scenario 2

Fed Tightens 50 bp per meeting / Spreads widen 100 bps


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





31



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.

Theo

reti

cal L

oss

0.54%

1.11%

2.25%

0.19% 0.50%

1.13%

0.94%

1.90%

2.86%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


The

ore

tica

l Lo

ss

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



Theoretical Value of Initial $100 Million Investment


Largest Interest Rate Shock

December 1980

3-Month Bills Rise 228 bps in One Week

$99,460,000

$98,890,000

$97,750,000

Interest Rate Shock

1994

3-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





33

Regulatory Reform Update


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



Rule Proposal Expected Q2/Q3 2014

Proposed Effective Date

for Alternative 2

Q2/Q3 2015

Proposed Effective Date

for Alternative 1

2016 Q2/Q3

Jan 2013

Obama names

Mary Jo White as

SEC Chairman

Feb 2013

FSOC proposal

comment deadline

(extended from Jan 18)

Feb/Mar 2013

Mary Jo White

confirmed as

SEC Chairman

Aug 2013

Stein and Piwowar

replace Walters and

Paredes at SEC

Sept 2013

SEC comment

deadline

Apr 2013

SEC rule

proposal issued

2013 Key Events

Future Timeline

Money Market Fund Reform Timeline

Source: iMoneyNet and Fidelity as of 9/30/13

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


38

Important Information

Not FDIC insured. May lose value. No bank guarantee.

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 02917

For Institutional Client Use Only

683929.2.0

Documents

Liquidity Management: Beyond Quantitative Easing · Global Business Cycle in a Trend of Modest Improvement 4 Note: This is a hypothetical illustration of a typical business cycle