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II.
Investments Results - Second Quarter 2010
DIF Investment Portfolio
- The amortized cost
(book value) of the DIF investment portfolio decreased by $21.2
billion, or 35.8 percent, during the first half
of 2010, from $59.3 billion on December 31, 2009, to $38.1 billion
on June 30, 2010. Similarly, the DIF portfolio’s primary
reserve (total market value plus accrued interest) decreased by
$21.3 billion, or 35.8 percent, from $59.5 billion on December
31, 2009, to $38.2 billion on June 30, 2010. During the period,
resolution outlays and operating expenses greatly exceeded receivership
payments and assessment collections.
- The DIF investment
portfolio’s total return for
the first half of 2010 was 0.08 percent, approximately 462 basis
points lower than its benchmark, the Merrill Lynch 1 – 10
Year U.S. Treasury Index (Index), which had a total return of 4.70
percent during the same period. Given that most longer-maturity
Treasury yields declined during the period (that is, prices rose),
the DIF portfolio’s large overnight investment and short-maturity
Treasury bill (T-Bill) balances invested in relatively low yielding
investments were a drag on performance relative to the Index’s
longer-duration conventional Treasury securities.
- In accordance
with the approved second quarter 2010 investment strategy, which
strove to balance the need for liquidity against the desire to pick
up some
yield by investing in short-maturity Treasuries, staff purchased
a total of four short-maturity T-Bills during the second quarter of
2010.
The four securities had a total par value of $4.8 billion, a
weighted average yield-at-cost of 0.18 percent, and a weighted average
maturity
(WAM) of 0.46 years.
Other
Corporate Investment Portfolios
- During the first half of 2010, the book value of the Debt Guarantee
Program (DGP) investment portfolio decreased from $6.4 billion
on December 31, 2009 to $5.8 billion on June 30, 2010. Although the DGP
portfolio
received a total of $322 million in reimbursements from Transaction
Account Guarantee (TAG) Program assessments at the end of the first and
second
quarters, the DGP reimbursed $970 million to the DIF portfolio
for claims against the TAG Program during the quarter, hence the net
decline. In
accordance with the approved second quarter 2010 investment strategy
for the DGP portfolio, staff purchased two short-maturity T-Bills
during the most recent quarter. The securities had a total par value
of $600
million, a weighted average yield-at-cost of 0.19 percent, and
a WAM of 0.49 years.
- During
the first half of 2010, as mentioned above, the FDIC collected
about $322 million in fees related to the TAG Program under the Temporary
Liquidity Guarantee Program. Again, these funds were immediately
transferred
to the DGP investment portfolio for reimbursement of claims and
expenses, so the TAG Program investment portfolio had no balance on
June 30,
2010.
The
Treasury Market
- Short-term
Treasury yields remained stable during the second quarter of
2010, while longer-term Treasury yields posted dramatic declines.
The three-month T-Bill yield actually increased by 2 basis points,
while the yield on the six-month T-Bill decreased by 1 basis
point. The one-year T-Bill yield declined by 7 basis points.
The two-year Treasury note yield, which is sensitive not only
to actual and anticipated changes in the federal funds rate,
but also to changes in investor sentiment, declined by 42 basis
points. Intermediate- to longer-maturity Treasury security yields
declined during the second quarter. The yield on the five-year
Treasury note declined by 77 basis points while the yield on
the ten-year Treasury note declined by 90 basis points. Consequently,
the conventional Treasury yield curve flattened during the second
quarter of 2010. On June 30, 2010, the two- to ten-year yield
curve had a 233-basis point positive spread (lower than the 281-basis
point spread at the beginning of the quarter). Over the past
five years, this spread has averaged 113 basis points.
Prospective
Strategies
- Similar
to the second quarter investment strategy, the third quarter
2010 DIF investment strategy calls for purchasing up to $15.0 billion
of shorter-term
Treasury securities with maturities between October 1, 2010,
and June 30, 2011. This strategy attempts to balance the need to maintain
sufficient
portfolio liquidity for the funding of potential near-term resolutions
against the yield pick-up that can be obtained by investing in
short-maturity Treasury securities.
- For the DGP portfolio, similar to its second quarter investment
strategy, the third quarter 2010 investment strategy calls for purchasing
up to $2.0 billion of Treasury securities with maturities between October
1, 2010, and June 30, 2011. Again, this strategy attempts to balance
the need to maintain sufficient portfolio liquidity against the yield
pick-up that can be obtained by investing in short-maturity securities.
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