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

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

   •  Summary Trends and Results
I. Corporate Fund Financial Results

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

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

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

II. DIF Investments Results - First Quarter 2008


  • The amortized cost (book value) of the DIF investment portfolio increased by $750 million or by 1.5 percent—from $50.469 billion on December 31, 2007, to $51.219 billion on March 31, 2008. Moreover, reflecting the Treasury rally during the period, the DIF portfolio’s market value increased by $2.113 billion or by 4.0 percent, from $52.378 billion on December 31, 2007, to $54.491 billion on March 31, 2008.
  • The DIF investment portfolio's total return for the first quarter of 2008 was 3.734 percent, approximately 72 basis points less than its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which had a total return of 4.455 percent during the same period. Given the significant rise in Treasury security prices during the quarter, the DIF portfolio’s large cash balance acted as a drag on total return performance.
  • During the first quarter of 2008, consistent with the approved quarterly Corporate investment strategy, staff deferred purchases of Treasury securities in light of the comparatively low Treasury yields available during the quarter. On March 31, 2008, the DIF portfolio’s overnight investment balance was $8.079 billion, well above its $150 million target floor balance.

The Treasury Market

  • During the first quarter of 2008, conventional Treasury yields decreased substantially, reflecting three cuts in federal funds target rate during the quarter totaling 200 basis points, and reflecting market sentiment for additional cuts in the target rate during next couple of quarters. In addition, Treasuries also rallied in response to “flight to quality” trades by investors seeking the relative safety of Treasury securities. In the first quarter, yields on three-month and six-month T-Bills decreased by 192 basis points and 191 basis points, respectively. The two-year note yield, which is also sensitive to actual as well as anticipated changes in the federal funds rate, decreased by 147 basis points, again, reflecting the aforementioned cuts in the federal funds target rate and reflecting expectations for additional rate cuts. Intermediate-maturity Treasury yields also decreased dramatically over the course of the quarter. The yield on the five-year Treasury note decreased by 100 basis points; the yield on the ten-year Treasury note decreased by 61 basis points. The conventional Treasury yield curve steepened during the first quarter of 2008; on March 31, 2008, the two-year to ten-year yield curve had a 183-basis point positive spread (compared to positive 97-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 96 basis points.
  • During the first quarter of 2008, Treasury Inflation-Protected Securities’ (TIPS) real yields decreased dramatically, reflecting lower actual and anticipated interest rates and concerns over weak economic growth. The magnitude of the declines was in line with the yield declines of comparable maturity conventional Treasury yields. The real yield of the DIF portfolio’s short-maturity TIPS (with a maturity of little under one-year at the end of the quarter) decreased by 169 basis points during the quarter. The real yield on the portfolio’s longest-maturity TIPS (with a maturity of just under four years) decreased by 100 basis points. The real yield on the 10-year TIPS maturing on January 15, 2017, decreased by 65 basis points.

Prospective Strategies

  • The current DIF investment strategy provides the flexibility to purchase a wide range of different Treasury securities with varying maturities, depending on Treasury market conditions and developments during the second quarter of 2008. In line with consensus expectations, Treasury yields should continue to trade generally within their current range, with the potential for a modest rise from quarter-end levels. During the second quarter of 2008, if appropriate, staff may take advantage of rising yields by purchasing short- to intermediate-maturity conventional Treasury securities and TIPS.
  • As part of the DIF portfolio’s approved first quarter 2008 investment strategy, an objective was established to reach a $15 billion primary reserve target floor balance, which was achieved; at quarter-end, the DIF portfolio’s primary reserve stood at $17.208 billion. The DIF portfolio’s second quarter 2008 investment strategy maintains the strategic objective of increasing the primary reserve, with newly purchased Treasury securities being designated AFS.
  • The current DIF investment strategy provides for purchasing AFS conventional Treasury securities with maturities of six years or less, for purchasing AFS TIPS, and for holding excess overnight investments, depending on Treasury market conditions and developments during the second quarter of 2008. Any securities purchased during the quarter will be designated AFS. As with recent quarterly investment strategies, conventional AFS securities will be limited to maturities of six years or less, as a means to help control fund balance volatility. (See attached Approved Investment Strategy.)


Last Updated 06/04/2008

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