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II.
DIF Investments Results - First Quarter 2009
Investment
Results
- The
amortized cost (book value) of the DIF investment portfolio decreased
by $2.1 billion (7.7 percent) during the first quarter of 2009,
from $26.6 billion on December 31, 2008, to $24.5 billion on
March 31, 2009. Similarly, the DIF portfolio’s market value
dropped by $2.4 billion (8.3 percent), from $28.8 billion on
December 31, 2008 to $26.4 billion on March 31, 2009. Again,
the declines were primarily the result of funding failed institution
resolutions during the quarter.
- The DIF investment portfolio's total return for the first
quarter of 2009 was 0.140 percent, approximately 46 basis points
higher than its benchmark, the Merrill Lynch 1 – 10 Year
U.S. Treasury Index (Index), which had a total return of -0.320
percent during the same period. The DIF portfolio’s Treasury
Inflation-Protected Securities (TIPS) considerably outperformed
the Index’s conventional Treasury securities; short-maturity
TIPS market real yields declined during the quarter while conventional
Treasury yields increased. Moreover, the DIF portfolio’s
cash balances held during the quarter helped contribute to the
positive relative return. Finally, because the DIF portfolio’s
conventional Treasury securities have a lower average duration
than the securities held in the Index, their price declines were
less than those of the Index.
- During
the first quarter of 2009, to help fund resolution-related cash
outlays, staff sold a total of eight AFS conventional Treasury
securities on four occasions; the securities had a total book
value of $1.2 billion, a total market value of $1.3 billion,
a weighted average maturity (WAM) of 7.90 years, a weighted average
modified duration of 6.09 years, and a weighted average yield-at-cost
of 4.90%. These security sales resulted in a realized gain of
$136.3 million. On March 31, 2009, the DIF portfolio’s
overnight investment balance was $1.5 billion (about 5.8 percent
of the portfolio by market value), largely reflecting the receipt
of almost $1.1 billion in assessments on March 30, 2009.
Other
Corporate Investment Portfolios
- The book value of
the recently established Debt Guarantee Program investment portfolio
increased from $2.4 billion on December 31, 2008,
to $6.2 billion on March 31, 2009. The funds in this portfolio
are
from the guarantee fees related to the Debt Guarantee Program
under the TLGP.
Consistent with the approved quarterly investment strategy, all
Debt Guarantee Program portfolio funds were invested in overnight investments
during the
quarter.
- On February 16, 2009, the
FDIC collected $20.2 million in dividends on the Fixed Rate Cumulative
Perpetual Preferred Stock, Series
G issued by Citigroup Inc. (Citigroup Stock). Subsequently, the
DIF should receive
dividends of $60.5 million per quarter from the Citigroup Stock.
These funds are segregated and invested separately from DIF’s
other cash and investments in the newly established Other Systemic
Risk Reserves
investment portfolio.
- On March 30, 2009,
the FDIC collected about $90.0 million in fees related to the transaction
account guarantee program under the TLGP.
However, on March 31, 2009, all funds were transferred to the DIF
portfolio for reimbursement of claims and expenses, so the newly established
Transaction
Account Guarantee Program investment portfolio had no balance at
month end.
The
Treasury Market
- During the first quarter of 2009, Treasury yields increased
modestly, with longer-maturity Treasuries posting the largest yield
increases. Although Treasury yields remain relatively low amid
continued flight-to-quality trades and in light of the weak U.S.
economy, the modestly higher yields appeared to generally reflect
concerns over the increasing supply of Treasury securities. The
three-month Treasury bill (T-Bill) and the six-month T-Bill yields
increased by 12 basis points and 16 basis points, respectively.
The yield on two-year Treasury note, which also is very sensitive
to actual and anticipated changes in the federal funds rate, as
well as to flight-to-quality concerns, increased by only four basis
points during the first quarter. Intermediate- to longer-maturity
Treasury security yields also increased, with longer-maturity Treasuries
posting the largest increases. The yield on the five-year Treasury
note increased by 12 basis points, while the yield on the ten-year
Treasury note increased by 45 basis points. Accordingly, the conventional
Treasury yield curve steepened during the first quarter of 2009;
on March 31, 2009, the two- to ten-year yield curve had a 186-basis
point positive spread (compared to a positive 154-basis point spread
at the beginning of the quarter). Over the past five years, this
spread has averaged 82 basis points.
Prospective
Strategies
- The
second quarter 2009 DIF investment strategy calls for placing
all net proceeds from deposit insurance assessments, maturing securities,
TLGP
surcharges, coupon and other interest payments, and receivership
dividends into overnight investments and/or short-term T-Bills in anticipation
of using such funds for resolution activities.
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