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

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II. DIF Investments Results - Fourth Quarter 2008


  • The amortized cost (book value) of the DIF investment portfolio decreased dramatically, dropping by $23.889 billion, or 47.3 percent, from $50.469 billion on December 31, 2007, to $26.580 billion on December 31, 2008. The DIF portfolio’s market value dropped by $23.548 billion or by 45.0 percent, from $52.378 billion on December 31, 2007, to $28.830 billion on December 31, 2008. The declines were primarily the result of funding failed institution resolutions during 2008.
  • The DIF investment portfolio's total return for 2008 was 8.55 percent, approximately 278 basis points less than its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which had a total return of 11.33 percent during 2008. 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 Treasury Inflation-Protected Securities (TIPS) considerably underperformed the Index’s conventional Treasury securities. Finally, as the DIF conventional Treasury securities have a lower average duration than the securities held in the Index, the extraordinary conventional Treasury security rally during the second half of 2008, which certainly benefited the DIF’s return, benefited the Index’s return even more as a result of its longer average duration.
  • During the fourth quarter of 2008, to help fund resolution-related cash outlays, staff sold a total of 19 securities on three occasions. These securities had a total book value of $4.328 billion, a total market value of $4.630 billion, a weighted average duration of 6.09 years, a weighted average maturity of 8.12 years, and a weighted average effective yield-at-cost of 4.95 percent. These security sales resulted in a realized gain of $302 million. On December 31, 2008, the DIF portfolio’s overnight investment balance was $971.1 million, largely reflecting the receipt of $867 million in assessments on December 30, 2008.

The Treasury Market

  • During the fourth quarter of 2008, conventional Treasury market yields decreased dramatically; along with the impact of the FOMC’s three rate cuts, the deepening economic crisis and financial market turmoil prompted a flight to quality with burgeoning investor demand for Treasury securities. The three-month Treasury bill (T-Bill) and the six-month T-Bill yields decreased by 82 basis points and 135 basis points, respectively. The 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, posted a yield decline of 120 basis points during the fourth quarter. Intermediate- to longer-maturity Treasury security yields declined even more than shorter-maturity securities, with investors’ abating inflationary concerns contributing to the yield declines. The yield on the five-year Treasury note declined by 143 basis points, while the yield on the ten-year note dropped by 161 basis points. The conventional Treasury yield curve flattened during the fourth quarter of 2008, reflecting the dramatic drop in yields on longer-maturity Treasuries; on December 31, 2008, the two- to ten-year yield curve had a 154-basis point positive spread (compared to positive 186-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 85 basis points.

Prospective Strategies

  • The first quarter 2009 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/or short-term T-Bills in anticipation of potential resolution activity. (See attached Approved Investment Strategy.)
  • For the newly established Debt Guarantee Program investment portfolio the first quarter 2009 investment strategy calls for investing all available funds in overnight investments, and/or in conventional or callable Treasury securities with effective maturity dates not to exceed June 30, 2012. An investment strategy likely to be implemented during the first and second quarters of 2009 will be to start developing a relatively even laddered maturity distribution out to June 30, 2012.

Last Updated 03/16/2009

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