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Chief Financial Officer's (CFO) Report to the Board

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Executive Summary

   •  Summary Trends and Results
I. Corporate Fund Financial Results

   •  DIF Balance Sheet
   •  DIF Income Statement
   •  DIF Statements of Cash Flows
   •  Selected Financial Data
 II. Investments Results & Prospective Strategies

   •  Deposit Insurance Fund Portfolio Summary
   •  Approved Investment Strategies
III. Budget Results

   •  Budget & Expenditures by Major Expense Categories
   •  Budget & Expenditures by Budget Component, Division & Office
Printable Version

II. DIF Investments Results - Third Quarter 2008

DIF

  • The amortized cost (book value) of the DIF investment portfolio decreased dramatically, dropping by $18.757 billion, or by 37.2 percent, from $50.469 billion on December 31, 2007, to $31.712 billion on September 30, 2008. The DIF portfolio’s market value dropped by $18.967 billion or by 36.2 percent, from $52.378 billion on December 31, 2007, to $33.411 billion on September 30, 2008.
  • The DIF investment portfolio’s total return for the first nine months of 2008 was 4.39 percent, approximately 21 basis points less than its benchmark, the Merrill Lynch 1-10 Year U.S. Treasury Index (Index), which had a total return of 4.61 percent during the same period. The DIF portfolio’s large cash balances held during the first half of the year acted as a drag on total return performance. In addition, the DIF portfolio’s TIPS considerably underperformed the Index’s conventional Treasury securities during the third quarter.
  • During the third quarter of 2008, to help fund resolution obligations, staff sold a total of 22 securities on seven occasions. These securities had a total book value of $8.872 billion, a total market value of $9.345 billion, a weighted average maturity of 4.88 years, and a weighted average effective yield-at-cost of 5.93 percent. These security sales resulted in realized gains of $473 million. On September 30, 2008, the DIF portfolio’s overnight investment balance was $851.2 million, which includes the receipt of $618.6 million in assessments on September 30, 2008.

The Treasury Market

  • During the third quarter of 2008, conventional Treasury market yields decreased dramatically as the deepening economic crisis and financial market turmoil prompted a flight to quality with burgeoning investor demand for Treasury securities. The yield declines also reflected growing consensus expectations for additional federal funds target rate cuts. The three-month Treasury bill (T-Bill) and the six-month T-Bill yields decreased by 83 basis points and 54 basis points, respectively. The two-year Treasury note, which is also very sensitive to actual and anticipated changes in the federal funds rate, as well as to flight-to-quality concerns, posted a yield decline of 66 basis points during the third quarter. Intermediate- to longer-maturity Treasury security yields also decreased over the course of the third quarter, although not surprisingly, the yield declines were somewhat less dramatic then those of shorter-maturity securities. The yield on the five-year Treasury note declined by 35 basis points, while the yield on the ten-year note dropped by 15 basis points. The conventional Treasury yield curve steepened during the third quarter of 2008, reflecting the drop in yields on shorter-maturity Treasuries. On September 30, 2008, the two-year to ten-year yield curve had a 186-basis point positive spread (compared to a positive 135-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 87 basis points.
  • During the third quarter of 2008, in stark contrast to conventional Treasury yields, TIPS real yields increased sharply over the course of the third quarter. For example, the real yield on the five-year TIPS maturing on July 15, 2013, increased by 124 basis points. The real yield on the 10-year TIPS maturing on January 15, 2017, increased by 83 basis points. Some analysts were attributing the rise in real yields to a sharp drop in inflation expectations given the recent collapse in oil and other commodity prices. In fact, current TIPS real yields indicate market expectations are that deflation over the near term is a distinct possibility. As of the end of the third quarter 2008, on a par value basis, 9.2 percent of the DIF portfolio is invested in TIPS.

Prospective Strategies

  • The current DIF investment strategy calls for placing all net proceeds from deposit insurance assessments, maturing securities, coupon and other interest payments, and receivership dividends into overnight investments and short-term T-Bills in anticipation of possible funding needs for resolution activities. (See attached Approved Investment Strategy.)

 



Last Updated 12/15/2008 dofbusinesscenter@fdic.gov