At its June policy meeting, the Federal Open Market Committee (FOMC) announced a six-month extension of its Maturity Extension Program (“MEP”, dubbed “Operation Twist” by the market), which entails selling short-term Treasuries to buy longer-term Treasuries. Will the Fed do more? We think Fed policy shifts occur when actual economic data runs counter to Fed forecasts. For example, the US inflation rate in 2010 ran well below the Fed’s forecasted rate all year, setting up the October 2010 “QE2” announcement aimed at fending off deflation. In September 2011, after economic growth disappointed all year relative to Fed forecasts, the FOMC announced the federal funds rate would likely be low until “late 2013”. In that vein, after its June meeting, the FOMC downgraded its economic growth forecasts by -0.5% for 2012 and -0.4% for 2013 compared to April–substantial downward revisions. This makes additional easing more likely in the months ahead should growth and hiring activity remain sluggish. Keep in mind also: additional easing would not necessarily be confined to “QE3” (outright asset purchases). It could include changes to the “forward rate guidance” in the policy statement (e.g., stating the federal funds rate could be low into 2015). Our forecast for real GDP growth of 2% in 2012 and the unemployment rate at or above 8% at year-end means short-term interest rates will remain at or near historic low levels. We do not expect a hike in the fed funds rate until 2014, at the earliest. Meanwhile longer-term interest rates, which typically are driven more by the prospects for inflation and growth, will continue to be heavily influenced by the ongoing global scramble for “safe” assets.
Florida Local Government Investment Trust
The Florida Local Government Investment Trust Short-Term Bond portfolio posted a return of 0.17% in June versus a benchmark return of -0.06%. For the fiscal year beginning 10/1/11, the portfolio has posted a return of 1.39% versus a benchmark return of 0.30%.
The markets remained challenging in June. Generally, risk sectors were out of favor for the majority of the month, as investors worried about European debt, a Chinese slowdown, and worsening economic data in the United States. An announcement regarding the European Central Bank’s willingness to fight the ongoing European crisis gave a sharp boost to the markets right at month-end, and most non-government sectors pulled out gains. Short-duration corporate bonds had an especially good month as demand remained strong.
We continue to look for opportunities to add yield to the portfolio, while maintaining S&P’s AAA rating.
Florida Trust Day to Day Fund
In June, the SEC yield on the Fund was 0.19%. While European headlines oscillated between good news and bad news, 3-month LIBOR remained in a range of 0.46% - 0.47% for the entire month. We are maintaining a higher-than-typical amount of the fund invested in the repo (with maturities ranging from overnight to five days) due to elevated short-term rates provided, in part, by the Federal Reserve’s operation twist program. The yields we are seeing on repo are in the context of 0.15% - 0.20% for overnight collateralized liquidity. When you compare that to yields investors can receive in the government space, one would need to purchase a 1-year Treasury note to match the yield we are seeing in repo; the choice is clear. At the same time, we continue to avoid unsecured European debt, preferring to maintain our European exposure in non-peripheral government-guaranteed paper.
The portfolio remains extremely liquid with over 50% of the portfolio invested in overnight and short-term securities. Additionally, 65% of the portfolio is invested in government or government guaranteed securities.