From the Investment Desk

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Highlights

Improved credit markets and a flattening yield curve characterized the second quarter.
Several large one-year and two-year floating rate note transactions were issued at tightening credit spreads, as the markets continued to normalize.
Liquidity remained a priority for the investment desk, while longer-dated maturities selectively delivered incremental alpha.

Market Update

Improved credit markets and a flattening yield curve characterized the second quarter. The three-month LIBOR rate declined 60 basis points in the second quarter, while the one-month LIBOR rate declined 20 basis points. The rapid decline in three-month LIBOR and the flattening of the curve challenged our investment desk, but we continued to pursue value in specific fixed-rate names on our approved list in the one-month to three-month sector. Overall, investor interest extended further along the money market curve with increased activity in the six-month and longer maturity space.

Several large one-year and two-year floating rate note transactions were issued at tightening credit spreads, as the markets continued to normalize. The deals performed well in the secondary market following issuance and, importantly, May marked the first month since September 2008 when non-guaranteed financial issuance surpassed guaranteed financial issuance. As recently as December 2008, the only issuance in the market was guaranteed.

Portfolio Strategy and Outlook

Liquidity remained a priority for the investment desk, while longer-dated maturities selectively delivered incremental alpha. Our investment desk managed liquidity with near-dated portfolio maturities, but additionally invested further out the maturity range as conditions continued to improve. The investment desk in conjunction with the credit team anticipates that our maturity profile will continue to extend as we see the markets return to a more normalized state, focusing on select credits with the best risk profiles from our approved list of names. The desk participated in floating-rate issuance, guaranteed by the FDIC or certain other sovereign entities. The portfolio also held limited exposure to asset-backed commercial paper, as the yields remain relatively low given the support of the Fed’s programs.

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