II. Investments Results - Second Quarter 2011

DIF Investment Portfolio

• The total liquidity (total market value including accrued interest) of all DIF-related investment portfolios stood at $45.0 billion on June 30, 2011, down from $46.2 billion on December 31, 2010, led by the decline in the DIF investment portfolio as discussed below.

• The DIF investment portfolio’s total market value decreased by $1.9 billion during the first half of 2011, and totaled $37.7 billion on June 30, 2011.  The decrease was primarily the result of having to fund 48 bank failures during the first half of 2011.  However, it should be noted that 35 of these failures were resolved as cash-conserving shared-loss transactions, requiring substantially lower initial resolution payments, thus helping to mitigate the decline in the DIF portfolio’s balance.  Moreover, during the first half of 2011, the DIF received $5.6 billion in dividends and other payments from its receiverships, thus mitigating the DIF portfolio’s decline. 

• On June 30, 2011, the DIF investment portfolio’s yield was 0.32 percent, down eight basis points from its December 31, 2010, yield of 0.40 percent.  A primary factor in that decline was that in January a substantial portion of higher yielding Treasury Inflation-Protected Securities (TIPS) matured, resulting in a drop in the portfolio’s overall yield.  The DIF investment portfolio’s total return for the year-to-date period was about 26 basis points, about 200 basis points less than the 2.27 percent total return of its benchmark, the Merrill Lynch 1 – 10 Year Treasury Index (Index).  Given that most longer-maturity Treasury yields decreased (that is, Treasury security prices rose) during the first half of the year, the DIF portfolio’s large balances of comparatively low yielding overnight investments and short-term Treasury bills and notes could not keep pace with the rise in Treasury prices, hence the underperformance compared to the Index (on average, the Index has longer-duration conventional Treasury securities).

• In accordance with the approved second quarter 2011 investment strategy, staff purchased a total of eight short-maturity Treasury securities on two occasions during the second quarter of 2011.  The securities had a total par value of $7.2 billion, a weighted average yield-to-maturity of 0.22 percent, and a weighted average maturity (WAM) of 0.77 years.

Other Corporate Investment Portfolios

• On June 30, 2011, the Debt Guarantee Program (DGP) investment portfolio stood at about $7.4 billion (total market value), up from its December 31, 2010, balance of $6.6 billion.  This increase was principally due to the net transfer of about $650 million from the DIF portfolio to the DGP portfolio (year-to-date), reversing payments made by the DGP to the DIF for Transaction Account Guarantee Program claims.  At quarter end, the DGP portfolio had a yield to maturity of 0.21 percent and a WAM of 0.42 years.  In accordance with the approved second quarter 2011 investment strategy for the DGP portfolio, staff purchased four short-maturity Treasury securities during the second quarter of 2011.  The securities had a total par value of $1.2 billion, a weighted average yield-to-maturity of 0.23 percent, and a WAM of 0.83 years.