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II. DIF Investments Results - Fourth Quarter 2008
DIF
- 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.
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