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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. DIF Investments Results - Second Quarter 2007


  • During the first half of 2007, the amortized cost (book value) of the DIF investment portfolio increased by $1.084 billion or by 2.22 percent—from $48.858 billion on December 31, 2006, to $49.942 billion on June 30, 2007. Moreover, during the period, the DIF portfolio’s market value increased by $698 million or by 1.42 percent, from $49.038 billion on December 31, 2006, to $49.736 billion on June 30, 2007.
  • The DIF investment portfolio's total return for the first half of 2007 was 1.866 percent, approximately 31.2 basis points higher than the return of the benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which earned 1.554 percent during the same period. The outperformance relative to the benchmark can be attributed to two factors: The strong performance of the DIF investment portfolio’s Treasury Inflation-Protected Securities (TIPS) holdings, which outperformed the benchmark’s conventional securities during the six-month period; and relatively high yields being earned on overnight investments, whose return also exceeded the benchmark return.
  • During the second quarter of 2007, staff purchased Treasury securities on seven occasions, purchasing a total of 15 conventional Treasury securities. The purchased securities had a total par value of $5.400 billion, a weighted average maturity of 9.70 years, a weighted average duration of 6.96 years, and a weighted average yield-to-maturity of 4.95 percent. Consistent with the approved second quarter 2007 investment strategy, one short-term Treasury note, with a maturity of 1.87 years, was designated as AFS. The other 14 securities, with maturities ranging from 7.94 years to 11.84 years, were designated as held-to-maturity (HTM). The total cash outlay for the securities was $6.407 billion. On June 30, 2007, the DIF portfolio’s overnight investment balance was $978.2 million, which is above the fund’s $150 million target floor balance. Staff continued its recent practice of holding excess funds in higher yielding overnight investments as a reasonable short term investment strategy. That said, the June 30, 2007, overnight investment balance was substantially lower than the March 31, 2007, overnight balance of $3.709 billion, meaning that staff purchased a larger amount of Treasury securities compared to the amount of net cash received during the quarter, taking advantage of the comparatively high Treasury market yields that became available during much of the latter half of 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 second quarter, during the third quarter of 2007 staff will take advantage of instances when yields rise toward the upper end of this trading range and accordingly would deploy funds into longer-maturity higher-yielding securities.

The Treasury Market

  • During the second quarter of 2007, most conventional Treasury yields increased. The yield changes appeared to primarily stem from investors’ concerns that stronger global economic growth may increase inflationary pressures, thus leading to higher global interest rates. During the quarter, yields on three-month and six-month T-Bills decreased; the T-Bill yield declines were the one exception to the general observation noted above. (The yield decline on T-Bill apparently stemmed from technical factors, such as supply and demand factors, rather than fundamental factors). The two-year note yield, which is sensitive to actual as well as anticipated changes in the federal funds rate, increased by 29 basis points during the second quarter, reflecting reduced expectations by most market participants for any federal funds rate cuts later this year. Intermediate-maturity Treasury yields also increased, with the five-year Treasury note yield increasing 39 basis points and the ten-year note yield increasing 38 basis points. The Treasury yield curve ended the second quarter still relatively flat; on June 30, 2007, the ten-year to two-year yield curve spread was a positive 16 basis points (compared to a positive seven-basis point spread at end of the first quarter of 2007). From a recent historical perspective, the curve remains significantly flatter; over the past five years, this spread has averaged 114 basis points.
  • During the second quarter of 2007, TIPS real yields increased, reflecting concerns over stronger global economic growth and correspondingly higher global interest rates. For example, the real yield on the DIF portfolio’s shortest-maturity TIPS (with a maturity of under one year) increased by 182 basis points during the quarter, while the real yield on the DIF portfolio’s longest-maturity TIPS (with a maturity of a little under five years) increased by 58 basis points. The real yield on the ten-year TIPS maturing on January 15, 2017, increased by 45 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 third quarter of 2007. From a longer-term investment perspective, purchasing primarily longer-maturity securities could make sense in light of current and expected near-term market conditions. Thus, similar to the strategy implementation during the second quarter, if higher yields become available—either as a result of a modest upward shift in the yield curve or because of potential yield volatility—the third quarter 2007 strategy allows for purchasing comparatively higher-yielding, longer-maturity Treasury securities.
  • The DIF portfolio’s primary reserve target floor balance will remain at $10 billion for the third quarter of 2007. The TIPS target limit will also remain at $10 billion, while the AFS security target limit is being increased from $9.0 billion to $9.5 billion, to ensure that the primary reserve target floor balance can be maintained during the remainder of the year (see attached Approved Investment Strategy).

Last Updated 08/15/2007

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