Update from the Re-Investment Desk - 1Q 2013
- Market conditions and sentiment have improved in general regarding the European situation as well as the U.S. labor and housing markets
- The market was active in floating rate securities, with maturities out to one year across various issuers
- Looking forward, we expect an environment in which overnight repo will remain range bound and issuers will continue to adjust term unsecured issuance levels to incentivize longer dated funding
First Quarter Review
During the first quarter of 2013, the FOMC, ECB, BOE and RBA all left their respective monetary policies unchanged. The market turned more optimistic regarding the European situation, taking note that global financial strains have eased. Investors were active buyers throughout the quarter, highlighted by strong interest in floating rate products across multiple names and regions into the one year area. In the U.S., repo declined from its sustained run at elevated levels due to numerous factors, including the expiration of unlimited FDIC insurance, the end of Operation Twist and the outright purchase of a combined $85 billion of Treasuries and mortgages by the Fed on a monthly basis. Demand for shorter dated funding from many issuers declined as they met or exceeded funding needs. Issuers re-entered the market, gaining access to investors who have added them back to their buy lists or have expanded allowable tenors. Other issuers have exited the market, or in the case of some of the Australian and U.S. asset backed commercial paper programs, have been reducing their margins, leading to a decrease in program size. J.P. Morgan purchases for eligible accounts throughout the quarter were focused primarily in fixed rate investments out to six months while also maximizing opportunities in floating rate products into the one year maturity range.
Looking ahead into the second quarter of 2013 and beyond, J.P. Morgan anticipates a market environment in which many issuers will continue to take short dated levels lower, while others attempt to re-enter the market if conditions and sentiment remain favorable, as many of the French issuers have notably done during the last several months. As European banks repay LTRO funds, J.P. Morgan expects demand for longer duration funding to continue, with banks returning to more traditional funding sources away from the ECB. We expect the RBA to keep a slight easing bias to monetary policy and the market will continue to front load expectations of a rate cut, keeping the AUD yield curve inverted, or flat at best. Although positive spreads to lend USD general collateral fixed income assets returned in 2013, if issuers continue to tighten term unsecured levels, this will again become a challenging environment in which to generate consistent profitable spreads and J.P. Morgan anticipates it will remain a challenge globally to lend fixed income general collateral at positive spreads, particularly for clients for whom cash collateral guideline parameters are constrained. Term repo structures and repo collateralized with equities and municipal bonds will provide alternatives and additional yield for eligible portfolios in an environment in which the traditional repo classes will likely remain range bound. Our strategy will focus on maintaining liquidity overnight and through our maturity structure, by layering bank and corporate investments in the one- to three-month maturity range. Term premiums should continue to differ on an issuer-by-issuer basis for longer maturities, and we will selectively target investments in the four- to six-month tenors for which we expect to receive a premium over available three-month yields of up to 15 basis points. We will continue seeking attractive opportunities for core holdings in longer dated high quality investments for eligible accounts, with a majority of our interest out to one year. These trades offer incremental yield and further diversification, providing access to some of the higher quality names that are no longer actively issuing in the shorter dates due to the excess liquidity that remains in that end of the market.