General Session & Market Updatetos.ohio.gov/CPIM/Files/CourseDocuments/6822-2018_CPIM...Over $11...
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General Session & Market Update
Transcript of General Session & Market Updatetos.ohio.gov/CPIM/Files/CourseDocuments/6822-2018_CPIM...Over $11...
General Session & Market Update
Presenters
• Jason Click, President, Public Funds
• Meeder Investment Management
• Jim McCourt, Vice President
• United American Capital Corporation
• Connor Chambers
• Huntington National Bank
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Yield Comparison
0.00
0.50
1.00
1.50
2.00
2.50
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18
STAR Ohio 1mo T-Bills Avg Govt Money Fund
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3As of 08/31/18 STAR Ohio 2.11%
1mo T-Bills 1.94%Avg. Govt. Money Fund 1.70%
Yield Comparison
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4-0.20%
0.30%
0.80%
1.30%
1.80%
2.30%
Dec
-14
Mar
-15
Jun
-15
Sep
-15
Dec
-15
Mar
-16
Jun
-16
Sep
-16
Dec
-16
Mar
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Jun
-17
Sep
-17
Dec
-17
Mar
-18
Jun
-18
Sep
-18
STAR Ohio S&P LGIP 7D Yield Index
Data as of 08/31/18
2.11%
1.98%
Yield Comparison
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
Sep
-15
Dec
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Mar
-16
Jun
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Sep
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Dec
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Mar
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Jun
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Sep
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Dec
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Mar
-18
Jun
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Sep
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STAR Plus CraneData Inst'l Gov't MF Index
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2.10%
1.70%
Data as of 08/31/18
Over $11 billion in DepositsComposition
44%
24%
21%
6%5%
8/31/2017
Commercial Paper - 44%Money Market Funds - 24%Government Bonds - 21%Repurchase Agreements - 6%Corporate Bonds - 5%
40%
20%
16%
12%
12%
8/31/2018
Commercial Paper - 40%Money Market Funds - 20%Government Bonds - 16%Repurchase Agreements - 12%Corporate Bonds - 12%
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Program AssetsSTAR Ohio & STAR Plus
Bill
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Data as of 09/01/18
$0
$2
$4
$6
$8
$10
$12
$14
Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
STAR Plus STAR Ohio
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STAR Ohio outlook
• Expect yields in STAR Ohio to continue to increase w/ subsequent rate hikes.
• LIBOR rates continue to look attractive.
• Commercial Paper and T Bill issuance has increased.
• STAR Plus rates should keep pace with government funds.
• First tier yield should remain competitive with STAR Ohio.
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Driving Forces Behind Fed Policy
U.S. economy is betting on the consumer
• PCE is key figure to track for inflation data – reveals consumers’ willingness to pay greater % amount for goods & services versus previous period.
• GDP remains strong as does employment.
• Wage inflation (in part due to tax cuts) may be key.
Geopolitical Concerns
• Trade wars make COGS more expensive for everyone in the short run.
• Real wars threaten the global economy even more.9
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Employment
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Source: Bloomberg L.P.Data as of: 08/31/18
57.0
58.5
60.0
61.5
63.0
64.5
66.0
67.5
69.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Civilian Unemployment Rate, Percent, Monthly, Seasonally Adjusted
Civilian Labor Force Participation Rate, Percent, Monthly, Seasonally Adjusted
Civilian Employment -Population Ratio, Percent, Monthly, Seasonally Adjusted
InflationPCE (YoY%)
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Source: Bloomberg L.P.Data as of: 08/31/18
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
PCE CYOY Index
Fed 2% Inflation Target
1.90
GDP Growth
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Source: Bloomberg L.P.Data as of: 08/31/18
2.8
-6
-4
-2
0
2
4
6
8
10
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
GDP CYOY Index
Data SentimentEconomic Surprise Index
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Source: Bloomberg L.P.Data as of: 08/31/18
0.235
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
ECSURPUS Index
Federal Reserve Outlook
Near Term Policy Outlook• Most economists expecting 1 more hike in 2018.
• 71% chance of December hike as of 9/24/18.
Longer Term Policy Outlook• Learning about Chairman Powell’s Fed.
• Board composition (still three open seats).
• GDP growth / inflation / demographics.
• Debt burden. 14
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Project Path of Fed Funds
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5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2018 2019 2020 Longer run
Source: Federal Reserve.
Interest Rate EnvironmentOver the last year, the Treasury yield curve has flattened upward.
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0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
9/24/2018 9/24/2017
1M 1Y 3Y 5Y 30Y10Y
Source: Bloomberg L.P.
Fed Balance Sheet Unwinding
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Source: Federal Reserve.
Bill
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2,900
3,100
3,300
3,500
3,700
3,900
4,100
4,300
4,500
4,700
5/1/2013 5/1/2014 5/1/2015 5/1/2016 5/1/2017 5/1/2018
Other factors
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• Student loan delinquencies continue to rise• Subprime auto loans defaults• Credit card balance delinquencies• “Two economies”?
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300
400
500
600
700
800
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
198
4
1986
1988
199
0
1992
1994
199
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2000
2002
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2008
2010
2012
2014
2016
2018
Households and Nonprofit Organizations; Net Worth as a Percentage of Disposable Personal Income (LHS)
Personal Savings as a Percentage of Disposable Personal Income (RHS)
Source: Federal Reserve.
Investing in Rising Rate Environment
Be Opportunistic
• Interest rate volatility will create moments of opportunity.
• Keep cash on hand, but be willing to put it to work when markets move your favor.
Be Disciplined
• Following a laddered or barbell strategy will keep portfolio balanced.
• Investing regularly will be smartest in the long run. Don’t be short-term greedy.
Be Flexible
• Keep your paradigm adaptable to a changing environment.
• New products and programs will come into favor while others will fade.19
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Commercial Paper (A1/P1) vs. Agency Discount Notes
Commercial PaperSpreads Remain Wide, But Tightening Slightly
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• Money market reform resulted in changes to prime funds.
• As a result, over $900B in assets moved to government funds.
• Commercial paper is a large component of prime funds.
• Decreased demand resulted in increased commercial paper yields.
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0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
9/24/2016 9/24/2017 9/24/2018
1 Month 3 Month 6 Month 9 Month
Source: Bloomberg, as of 09/24/2018.
• Agency spreads have narrowed against Treasuries.
• CDs trailing on short end as banks adjusting funding slower than market.
• Longer term CD rates are 15-20 bps higher than 2–5 year agency bullets.
Benchmark Yields
Certificates of DepositCD Yields Lagging on Short End, Exceeding on Long End
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2.40% 2.61% 2.69% 2.71% 2.74%
2.42%
2.64% 2.73% 2.75% 2.81%2.45%
2.69%2.93% 3.01% 3.24%
2.70%
3.00%3.10% 3.15%
3.30%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR
TREASURIES AGENCY BULLET AGENCY CALLABLE CDs
Source: Bloomberg, as of 08/13/2018.
Agency Spreads to Treasuries
Callable Agency BondsProvides Yield Enhancement Over Bullets
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• Callables can achieve incremental yield compared to noncallable agencies.
• Required liquidity is an important factor when deciding to add callable agency bonds to a portfolio.
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2.40% 2.61% 2.68% 2.71% 2.74%
0.01%0.03% 0.05%
0.04% 0.07%0.04%0.08%
0.25% 0.30%0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR
TREASURIES AGENCY BULLET AGENCY CALLABLE
Source: Bloomberg, as of 08/13/2018.
Thank You!
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• Jason Click, President, Public Funds
• Meeder Investment Management
• Jim McCourt, Vice President
• United American Capital Corporation
• Connor Chambers
• Huntington National Bank
MyCPIM Password
MARKET
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