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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 - Fourth Quarter 2007


  • During 2007, the amortized cost (book value) of the DIF investment portfolio increased by $1.611 billion or by three percent—from $48.858 billion on December 31, 2006, to $50.469 billion on December 31, 2007. Moreover, during the period, the DIF portfolio’s market value increased by $3.340 billion or by seven percent, from $49.038 billion on December 31, 2006, to $52.378 billion on December 31, 2007.
  • The DIF investment portfolio's total return for 2007 was 8.63 percent, approximately 23 basis points less than its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which had a total return of 8.86 percent during the same period. Given the significant rise in Treasury security prices during the year reflecting lower market yields, the DIF portfolio’s large cash balance acted as a drag on relative total return performance.
  • During the fourth quarter of 2007, consistent with the approved quarterly Corporate investment strategy, staff deferred purchases of Treasury securities in light of the comparatively low Treasury yields available during the quarter. On December 31, 2007, the DIF portfolio’s overnight investment balance was $4.240 billion, well above its $150 million target floor balance.

The Treasury Market

  • During the fourth quarter of 2007, conventional Treasury yields decreased substantially, reflecting two 25-basis point cuts in federal funds target rate during the quarter, and reflecting market sentiment for additional cuts in the target rate during the first quarter and second quarters of 2008. In addition, Treasuries also rallied in response to “flight to quality” trades by investors seeking the relative safety of Treasury securities. In the fourth quarter, yields on three-month and six-month T-Bills decreased by 56 basis points and 69 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 93 basis points, again, reflecting the aforementioned 50-basis point cut in the federal funds rate and reflecting expectations for additional rate cuts. Intermediate-maturity Treasury yields also decreased over the course of the quarter. The yield on the five-year Treasury note decreased by 80 basis points; the yield on the ten-year Treasury note decreased by 57 basis points. The conventional Treasury yield curve steepened during the fourth quarter of 2007; on December 31, 2007, the two-year to ten-year yield curve had a 97-basis point positive spread (compared to positive 61-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 99 basis points.
  • During the fourth quarter of 2007, Treasury Inflation-Protected Securities’ (TIPS) real yields decreased dramatically, reflecting lower actual and anticipated interest rates and concerns over weak economic growth. In addition, as the magnitude of the declines in many cases were larger than those of comparable maturity conventional Treasury yields, such real yield declines reflect some modest concerns over growing inflationary pressures. The real yield of the DIF portfolio’s short-maturity TIPS (with a maturity of a little over one-year at the end of the quarter) decreased by 130 basis points during the quarter. The real yield on the portfolio’s longest-maturity TIPS (with a maturity of just over four years) decreased by 107 basis points. The real yield on the 10-year TIPS maturing on January 15, 2017, decreased by 57 basis points.

Prospective Strategies

  • The current DIF investment strategy provides for purchasing AFS conventional 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 first quarter of 2008. During the quarter, if appropriate, staff will take advantage of any instances when yields rise toward the upper end of the recent trading range by purchasing short- to intermediate-maturity conventional Treasury securities and TIPS. Any securities purchased during the quarter will be designated AFS. As with recent quarterly investment strategies, conventional AFS securities will be limited to maturities of six years or less, as a means to help control fund balance volatility. (See attached Approved Investment Strategy.)
  • As part of the DIF portfolio’s approved fourth quarter investment strategy, an objective was established to reach a $15 billion primary reserve target floor balance over the near term, with the understanding that this goal would not be reached until at least the first quarter of 2008. At the end of the fourth quarter of 2007, the primary reserve stood at $14.317 billion. The DIF portfolio’s first quarter 2008 investment strategy continues to include this primary reserve target objective.


Last Updated 02/21/2008

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