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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. Investments Results - First Quarter 2007


  • During the first quarter of 2007, the par value of the DIF investment portfolio increased by $568 million or by 1.22 percent—from $46.483 billion on December 31, 2006, to $47.051 billion on March 31, 2007. Moreover, during the quarter, the DIF portfolio’s market value increased by $730 million or by 1.49 percent, from $49.038 billion on December 31, 2006, to $49.768 billion on March 31, 2007.
  • The DIF investment portfolio's total return for the first quarter of 2007 was 1.655 percent, approximately 10.3 basis points higher than the return of the benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which earned 1.552 percent during the same period. The outperformance relative to the benchmark can be attributed to the strong performance of the DIF investment portfolio’s TIPS holdings, which outperformed the benchmark’s conventional securities during the quarter.
  • During the first quarter of 2007, staff purchased Treasury securities on two occasions, both purchases occurring in January. Staff purchased four securities with a total par value of $1.300 billion, a weighted average maturity of 6.34 years, a weighted average duration of 5.10 years, and a weighted average yield-to-maturity of 4.835 percent. During February and March, staff continued its recent practice of deferring purchases of longer-maturity securities and holding excess funds in higher-yielding overnight investments. On March 31, 2007, the DIF portfolio’s overnight investment balance was $3.709 billion, well above its $150 million target floor, and higher than the $2.949 billion balance on December 31, 2006, meaning that staff purchased a smaller amount of Treasury securities compared to the amount of net cash received during the quarter.
  • In line with consensus expectations, yields should continue to trade generally within their current range, but with the potential for a modest rise from quarter-end levels. Similar to the strategy employed during the first quarter, during the second quarter, staff will take advantage of instances when yields rise toward the upper end of this trading range and accordingly will deploy funds into longer-maturity higher-yielding securities.

The Treasury Market

  • During the first quarter of 2007, conventional Treasury yields were little changed over the short-end of the curve and decreased modestly across the remaining maturity sectors. This non-parallel yield curve shift may be attributed to market expectations that the Federal Reserve was unlikely to cut the federal funds target rate over the near term, although expectations for rate cuts later this year have grown stronger. The yield on the three-month Treasury bill increased by two basis points, while the yield on the six-month Treasury bill decreased by two basis points. The two-year note yield, which is also sensitive to actual as well as anticipated changes in the federal funds rate, decreased by 24 basis points, again, reflecting stronger consensus expectations that the federal funds target rate will be cut later this year. Intermediate-term Treasury yields also decreased, with the five-year Treasury note yield declining 16 basis points and the ten-year note yield declining a more modest six basis points. The Treasury yield curve ended the first quarter very flat and slightly positive; on March 31, 2007, the ten-year to two-year yield curve spread was a positive seven basis points (compared to a negative 11-basis point spread at end of the fourth quarter of 2006). From a recent historical perspective, the curve remains significantly flatter; over the past five years, this spread has averaged 123 basis points.
  • During the first quarter of 2007, TIPS real yields decreased, reflecting concerns over weak economic growth as well as lingering inflationary pressures. For example, the real yield on the DIF portfolio’s longest-maturity TIPS (with a maturity of a little under five years) decreased by 41 basis points. The real yield on the ten-year TIPS maturing on January 15, 2016, decreased by 23 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 2007. Similar to the first quarter 2007 investment strategy, if higher yields become available—either as a result of an upward shift in the yield curve or because of potential yield volatility—the second quarter 2007 strategy provides the flexibility to purchase comparatively higher-yielding, longer-maturity Treasury securities. Given the flat Treasury yield curve, purchasing short- and intermediate-maturity Treasuries may also make sense.
  • The DIF portfolio’s primary reserve target floor balance will remain at $10 billion for the second quarter of 2007. The target limit for TIPS will also remain at its current $10 billion target, while the AFS security target limit is being increased from $8.7 billion to $9.0 billion to help ensure that the primary target floor balance can be maintained during 2007 (see attached Approved Investment Strategy).

Last Updated 11/27/2007

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