Market Commentary – January 2012
Following a volatile 2011, 2012 is off to a positive start. Going into the year capital markets were generally priced for bad news. However, global central banks shifted gears in the developed and emerging markets with more aggressive monetary policy initiatives that altered market sentiment for the better. The European Central Bank (ECB) provided cheap, long-term financing to banks and the Federal Reserve (Fed) stated that economic conditions warranted low short-term interest rates until late 2014. In addition, positive economic data from the US and China (the country posted 8.9% economic growth rate in the fourth quarter) defied expectations of bad economic news and have contributed to the performance of risk markets in January. Yet, even with global sentiment on the upswing, developed nations’ government bond yields hover stubbornly at low yields (with 10-year benchmark German bunds and US Treasuries orbiting in and around 1.8%). Such low yield levels suggest that the demand for safe, liquid assets worldwide remains high, and that downside risks remain for 2012.
We expect the US economy to expand at a 2% annual rate in the first half of 2012. However, this below-trend growth will keep the unemployment rate hovering around 8.5% over the next 6-12 months. As a result, we do not foresee interest rate hikes from the Fed until 2014, at the earliest. This implies front-end rates will remain low until more progress is made on the job creation front. In this environment, we expect longer-term Treasury rates will also remain low and only rise gradually as economic growth gains traction. This slow-to-moderate economic growth, low-inflation scenario is still favorable for an array of fixed-income sectors that offer a “pick up” in additional yield over US Treasuries.
Florida Local Government Investment Trust
The Florida Local Government Investment Trust Short-Term Bond portfolio posted a return of 0.50% in January versus a benchmark return of 0.11%. For the fiscal year beginning 10/1/11, the portfolio has posted a return of 0.73% versus a benchmark return of 0.31%.
In January, we continued to emphasize those sectors (corporate bonds, asset-backed securities) that out-yield US Treasuries in the current low rate environment, as those sectors continue to offer compelling yield and capital appreciation opportunities. We added to our high-quality financial corporate exposure by purchasing names such as Metlife, GE Capital Corp, and NY Life (all AA-rated). In addition, we purchased AAA-rated UK government-guaranteed issuance by Network Rail at a spread of 60 basis points over the 3-year Treasury note. We will maintain our neutral to slightly longer duration position in the belief that the Fed can be held to its word in not increasing interest rates until 2014.
We continue to look for opportunities to add duration and yield to the portfolio, while maintaining S&P’s AAA rating.
Florida Trust Day to Day Fund
In January, the SEC yield on the Fund was 0.16%. Year-end funding pressures kept a lid on short rates, despite 3-month LIBOR moving higher throughout December. January saw a reversal of both trends. Specifically, 3-month LIBOR fell month-over-month for the first time since June of last year while short rates rose, albeit modestly. We continue to invest in for opportunities to purchase as much fixed-rate credit as possible in the portfolio for the yield advantage over other securities. Nevertheless, the portfolio remains extremely liquid with 50% of the portfolio invested in overnight and short-term securities. Additionally, over 70% of the portfolio is invested in government or government guaranteed securities.