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

301 Moved Permanently

301 Moved Permanently


II. DIF Investments Results - Second Quarter 2009

Investment Results

  • The amortized cost (book value) of the DIF investment portfolio decreased by $5.8 billion during the first half of 2009, or 21.8 percent, from $26.6 billion on December 31, 2008, to $20.8 billion on June 30, 2009. Similarly, the DIF portfolio’s market value dropped by $7.1 billion or 24.6 percent, from $28.8 billion on December 31, 2008, to $21.8 billion on June 30, 2009. Again, the declines were primarily the result of funding failed institution resolutions during the first half of 2009.
  • The DIF investment portfolio's total return for the first half of 2009 was -0.681 percent, approximately 175 basis points higher than its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which had a total return of -2.435 percent during the same period. The DIF portfolio’s Treasury Inflation-Protected Securities (TIPS) considerably outperformed the Index’s conventional Treasury securities. In addition, because the DIF conventional Treasury securities have a lower average duration than the securities held in the Index, and given the large increase in yields on longer duration securities, the DIF’s conventional Treasury securities outperformed those in the Index. Finally, the DIF portfolio’s high cash balances helped contribute to the positive relative return.
  • During the second quarter of 2008, to help fund resolution-related cash outlays, staff sold a total of twenty AFS conventional Treasury securities on four occasions; the securities had a total book value of $4.2 billion, a total market value of $4.7 billion, a weighted average maturity (WAM) of 6.6 years, a weighted average modified duration of 5.3 years, and a weighted average yield at cost of 4.8 percent. These security sales resulted in a realized gain of $521.2 million. On June 30, 2009, the DIF portfolio’s overnight investment balance was $3.7 billion (about 17.0 percent of the portfolio by market value), to a large extent reflecting the receipt of approximately $2.6 billion in million regular deposit insurance assessments on June 30, 2009.

Other Corporate Investment Portfolios

  • During the second quarter, the book value of the DGP investment portfolio increased from $6.2 billion on March 31, 2009, to $7.5 billion on June 30, 2009. The funds in this portfolio are from the guarantee fees related to the debt guarantee program under the TLGP. Consistent with the approved quarterly investment strategy, all Debt Guarantee Program portfolio funds were invested in overnight investments during the quarter.
  • During the second quarter, the Other Systemic Risk Reserves investment portfolio increased from $20.2 million on March 31, 2009 to $80.7 million on June 30, 2009, reflecting the May 15, 2009 receipt of $60.5 million in dividends on the Citigroup Capital XXXIII 8% Capital Securities issued by Citigroup Inc. (Citigroup Stock). Subsequently, the DIF should receive dividends of $60.5 million per quarter from the Citigroup Stock. These funds are segregated and invested separately from DIF’s other cash and investments.
  • On June 30, 2009, the FDIC collected about $178.7 million in fees related to the TAGP under the TLGP. However, these funds were then immediately transferred to the DIF and the DGP portfolios for reimbursement of claims and expenses paid on the TAGP’s behalf, so the TAGP investment portfolio had no balance at month end.

The Treasury Market

  • During the second quarter of 2009, most conventional Treasury yields increased substantially, with longer-maturity Treasuries posting the largest yield increases. The three-month Treasury bill (T-Bill) and the six-month T-Bill yields declined, albeit just slightly by 2 basis points and 8 basis points, respectively. The yield on 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, increased by 31 basis points during the second quarter, reflecting some investors’ forecast for a higher federal funds target rate by late this year as well as some unwinding of flight-to-quality trades. Intermediate- to longer-maturity Treasury security yields increased substantially; the yield on the five-year Treasury note increased by 90 basis points, while the yield on the ten-year Treasury note increased by 87 basis points. Accordingly, the conventional Treasury yield curve steepened during the second quarter of 2009; on June 30, 2009, the two-year to ten-year yield curve had a 242-basis point positive spread (compared to a positive 186-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 83 basis points.

Prospective Strategies

  • The third quarter 2009 DIF investment strategy calls for placing all net proceeds from deposit insurance assessments, maturing securities, Temporary Liquidity Guarantee Program surcharges, coupon and other interest payments, and receivership dividends into overnight investment and/or short-term T-Bills in anticipation of using such funds for resolution activities.
  • For the DGP and Other Systemic Risk Reserves investment portfolios—which by contrast to the DIF portfolio are in investment mode—the third quarter 2009 investment strategy calls for strategically investing all available funds in overnight investments, and/or in conventional or callable Treasury securities with effective maturity dates not to exceed December 31, 2012.

Last Updated 09/02/2009

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