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II.
Investments Results - Third Quarter 2010
DIF Investment Portfolio
- The amortized cost (book value) of the DIF investment portfolio decreased by $21.8 billion during the first three quarters of 2010, or 36.8 percent, from $59.3 billion on December 31, 2009, to $37.4 billion on September 30, 2010. Similarly, the DIF portfolio’s primary reserve (total market value plus accrued interest) decreased by $22.0 billion or 37.0 percent, from $59.5 billion on December 31, 2009, to $37.5 billion on September 30, 2010. During the period, resolution outlays and operating expenses greatly exceeded receivership payments, assessment collections, and other inflows.
- The DIF investment portfolio’s total return for the first three quarters of 2010 was 0.13 percent, 698 basis points lower than its benchmark, the Merrill Lynch 1 – 10 Year U.S. Treasury Index (Index), which had a total return of 7.11 percent during the same period. Given that most longer-maturity Treasury yields declined during the period (that is, Treasury security prices rose), the DIF portfolio’s large balances of comparatively low yielding overnight investments and short-maturity Treasury bills (T-Bills) were a drag on performance relative to the Index’s longer-duration conventional Treasury securities.
- In accordance with the approved third quarter 2010 investment strategy, which strove to balance the need for liquidity against the desire to pick up some yield by investing in short-maturity Treasuries, staff purchased a total of four short-maturity T-Bills during the third quarter of 2010. The four securities had a total par value of $4.0 billion, a weighted average yield-at-cost of 0.19 percent, and a weighted average maturity (WAM) of 0.45 years.
Other
Corporate Investment Portfolios
- During the first three quarters of 2010, the book value of the Debt Guarantee Program (DGP) investment portfolio decreased from $6.4 billion on December 31, 2009, to $6.2 billion on September 30, 2010. Although the DGP portfolio received a total of $433 million in reimbursements from Transaction Account Guarantee (TAG) Program assessments during the period, the DGP reimbursed $712 million to the DIF for claims against the TAG Program, hence the net decline in the DGP investment portfolio. In accordance with the approved third quarter 2010 investment strategy for the DGP portfolio, staff purchased two short-maturity T-Bills during the most recent quarter. The securities had a total par value of $600 million, a weighted average yield-at-cost of 0.19 percent, and a WAM of 0.46 years.
- During the first three quarters of 2010, as mentioned above, the FDIC collected about $433 million in fees related to the TAG Program under the Temporary Liquidity Guarantee Program. Again, these funds were immediately transferred to the DGP investment portfolio for reimbursement of claims and expenses, so the TAG Program investment portfolio had no balance on September 30, 2010.
The
Treasury Market
- Short-maturity Treasury bill yields declined modestly during the third quarter of 2010, while longer-maturity Treasury yields posted more dramatic declines. The three-month T-Bill yield decreased by 2 basis points, while the yield on the six-month T-Bill decreased by 3 basis points. The one-year T-Bill yield declined by 6 basis points. The two-year Treasury note yield, which is sensitive not only to actual and anticipated changes in the federal funds rate, but also to changes in investor sentiment, declined by 18 basis points. Intermediate- to longer-maturity Treasury security yields declined during the third quarter. The yield on the five-year Treasury note declined by 51 basis points, while the yield on the ten-year Treasury note declined by 42 basis points. Consequently, the conventional Treasury yield curve flattened during the quarter. On September 30, 2010, the two-year to ten-year yield curve had a 209-basis point positive spread (lower than the 233-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 123 basis points.
Prospective
Strategies
- Similar to the third quarter investment strategy, the fourth quarter 2010 DIF investment strategy calls for purchasing up to $20.0 billion of shorter-term Treasury securities with maturities between January 1, 2011, and December 31, 2011. This strategy attempts to balance the need to maintain sufficient portfolio liquidity for the funding of potential near-term resolutions against the yield pick-up that can be obtained by investing in short-maturity Treasury securities.
- For the Debt Guarantee Program, similar to its third quarter investment strategy, the fourth quarter 2010 investment strategy calls for purchasing up to $2.0 billion of Treasury securities with maturities between January 1, 2011, and December 31, 2011. Again, this strategy attempts to balance the need to maintain sufficient portfolio liquidity against the yield pick-up that can be obtained by investing in short-maturity securities.
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