From the Investment Desk

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Highlights

Global Financial markets remain focused on euro-zone developments as an aid package is structured for Ireland
Active floating rate market as Canadian and Australian Banks lead the way
Market conditions warrant continued prudence and our strategy remains focused on structuring liquidity and maintaining a defensive posture

Outlook and Strategy

The fourth-quarter was in many ways a continued expansion of themes that developed through the second and third quarters of 2010. The short-end market remained focused on the euro-zone as a bailout package was completed for Ireland. LIBOR rates were largely unchanged as investors remained active during the quarter. The floating rate market saw increased issuance as Canadian and Australian Banks were able to issue in the 13-month period. This activity opened the market and stronger banks and corporate issuers began to access the market in longer, 18-month to 3-year maturities. Our strategy throughout the quarter remained focused on liquidity. This focus allowed the Desk to quickly respond to market conditions and manage the ever challenging month-end and quarter-end periods.

The portfolio investment activity remains concentrated in maturities that are within 95 days. We have utilized select credits out to 185 days in the fixed rate market when value opportunities present themselves. Throughout the market environment of the past few years the Desk has witnessed the value portfolio liquidity plays in allowing us to address any challenge. The focus on building and maintaining liquidity through our maturity structure, with portfolio maturities in the 2-30 day range as well as total liquidity less than 95 days continues to serve the program well. In addition to our fixed-rate strategy, we remain buyers of floating-rate issuance. Our preferred index throughout much of the year has been LIBOR, preferably 1-month. The Desk has broadened interest to other indices beyond LIBOR, primarily the Fed Effective rate. These floaters reset daily and present value in a market where LIBOR rates remain steady and volatility has been non-existent. The Desk’s aim is to create an investment product that supports our client’s lending activities and is responsive to the market environment, while matching their individual risk profiles.

The Desk believes that euro-zone concerns remain and will continue to challenge the markets in 2011 as the global economy continues its recovery. We welcome the opportunity that these times provide to foster open communication between J.P. Morgan and our client base. The Desk looks forward to continued discussions around your program as we assess the risks and rewards of your reinvestment portfolio and its importance to your overall securities lending strategy.

To view the next article, From the Lending Desk: Equities, please click here.

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