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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 - Third Quarter 2007


  • During the first nine months of 2007, the amortized cost (book value) of the DIF investment portfolio increased by $1.704 billion or by three percent—from $48.858 billion on December 31, 2006, to $50.562 billion on September 30, 2007. Moreover, during the period, the DIF portfolio’s market value increased by $2.322 billion or by five percent, from $49.038 billion on December 31, 2006, to $51.360 billion on September 30, 2007.
  • The DIF investment portfolio's total return for the first nine months of 2007 was 5.134 percent, approximately the same as its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which earned 5.139 percent during the same period.
  • During the third quarter of 2007, staff purchased just one conventional Treasury security. This newly purchased held-to-maturity (HTM) security had a par value of $400 million, a maturity of 12.00 years, a modified duration of 8.22 years, and a yield-to-maturity of 4.87 percent. The total cash outlay for this high coupon security was $517 million. On September 30, 2007, the DIF portfolio’s overnight investment balance was $2.850 billion, well above its $150 million target floor balance. Consistent with the approved third quarter Corporate investment strategy, staff deferred purchases of Treasury securities not only in light of comparatively low Treasury yields available during much of the quarter, but more importantly, to build up liquidity for the anticipated NetBank resolution. (This fairly large bank failure occurred on September 28, 2007, with significant resolution funding occurring in October 2007.)

The Treasury Market

  • During the third quarter of 2007, conventional Treasury yields decreased substantially, particularly on the short end of the yield curve, reflecting the 50 basis point cut in the federal funds target rate that occurred on September 18, 2007, and reflecting market sentiment for additional cuts in the target rate during the last quarter of 2007 and the first quarter of 2008. During the quarter, yields on three-month and six-month T-Bills decreased by 100 basis points and 86 basis points, respectively. The two-year note yield, which is also sensitive to actual as well as anticipated changes in the federal funds rate, decreased by 88 basis points, again, reflecting the aforementioned 50 basis point cut in the target rate and reflecting expectations for additional target rate cuts. Intermediate-maturity Treasury yields also decreased over the course of the quarter, although not surprisingly, the yield declines were more modest, as is often the case when an expected series of interest rate cuts is initiated. The yield on the five-year Treasury note decreased by 68 basis points. The yield on the ten-year Treasury note decreased by 43 basis points. It should be noted that most of the decrease in yields occurred between mid-July and the early part of September; towards the latter half of September, yields on intermediate- to longer-maturity securities actually started to modestly increase as investors unwound some earlier so-called “flight to quality” trades. The conventional Treasury yield curve steepened during the third quarter of 2007; on September 30, 2007, the two-year to ten-year yield curve had a 61-basis point positive spread (compared to a modestly positive 16-basis point spread at the beginning of the quarter). Nevertheless, the Treasury yield curve still remains flatter from a recent historical perspective; over the past five years, this spread has averaged 106 basis points.
  • During the third quarter of 2007, most Treasury Inflation-Protected Securities’ (TIPS) real yields decreased, reflecting lower actual and anticipated interest rates and concerns over weak economic growth. However, the real yield on the DIF portfolio's shortest-maturity TIPS (with a maturity of just over three months at the end of the quarter) increased by 50 basis points during the quarter 1. The real yield on the portfolio's longest-maturity TIPS (with a maturity of a little over four years) decreased by 50 basis points. The real yield on the 10-year TIPS maturing on January 15, 2017, decreased by 36 basis points.

Prospective Strategies

  • The current DIF investment strategy provides for purchasing AFS conventional Treasury securities with maturities of six years or less, for purchasing AFS TIPS, and for holding excess overnight investments, depending on Treasury market conditions and developments during the fourth quarter of 2007.
  • The DIF portfolio’s primary reserve balance is being increased, with a goal of reaching a $15 billion target floor balance over the near term. Any securities purchased during the fourth quarter will be designated AFS. (See attached Approved Investment Strategy.)

Other Matters

  • Effective September 30, 2007, the FDIC and the U.S. Treasury’s Federal Financing Bank (FFB) entered into an agreement to extend the FDIC’s existing $40 billion line of credit with the FFB for an additional one-year period through September 30, 2008.

1 Very short-maturity TIPS can have dramatic changes in real yields stemming from very near-term inflation expectations. Consequently, it is not unusual for very short-maturity TIPS’ real yields, which are quoted on an annual basis, to exhibit dramatic swings as they approach maturity.

Last Updated 11/26/2007

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