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II.
Investments Results - Fourth Quarter 2009
DIF Investment Portfolio
- The
amortized cost (book value) of the DIF investment portfolio increased
by $32.7 billion during 2009, or by 123 percent, from $26.6 billion
on December 31, 2008, to $59.3 billion on December 31, 2009.
Similarly, the DIF portfolio’s market value increased by
$30.6 billion, or by 106 percent, from $28.8 billion on December
31, 2008, to $59.4 billion on December 31, 2009. During the year,
deposit insurance assessment collections—including the
$45.7 billion in prepaid assessment collected at the end of December
2009—and other cash inflows exceeded operating expenses
and resolution-related cash outlays.
- The
DIF investment portfolio’s total return for 2009 was 0.306
percent, approximately 172 basis points higher than that of its
benchmark, the Merrill Lynch 1 – 10 Year U.S. Treasury
Index (Index), which had a total return of -1.411 percent during
the same period. The DIF portfolio’s higher-yielding Treasury
Inflation-Protected Securities (TIPS) considerably outperformed
the Index’s conventional Treasury securities. In addition,
because the DIF’s conventional Treasury securities have
a lower average duration than the securities held in the Index—and
given the substantial increase in yields over the course of the
year 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
fourth quarter of 2009, staff did not need to sell any Treasury
securities to help fund resolution-related cash outlays, as the
DIF had received
about $8.7 billion at the end of the third quarter of 2009 from
regular quarterly deposit insurance assessments and special assessments.
Although
there were 45 bank failures during the fourth quarter, resolution
outlays were relatively low, as several of the larger failures
were resolved
as whole bank transactions with loss-share agreements.
Other
Corporate Investment Portfolios
- During
2009, the book value of the Debt Guarantee Program investment
portfolio increased substantially, from $2.4 billion on December
31, 2008 to
$6.4 billion on December 31, 2009. The funds in this portfolio
are from the guarantee fees related to the Debt Guarantee Program
under the TLGP. More recently, during the fourth quarter, the
book value
of the Debt Guarantee Program investment portfolio decreased
from $7.0 billion on September 30, 2009, to the aforementioned
$6.4 billion.
The recent decline in funds was due to the fact that new Debt
Guarantee Program fees received were less than the transfer of
funds that were
used to reimburse the DIF for claims under the TLGP’s Transaction
Account Guarantee Program. Consistent with the approved quarterly
investment strategy, all Debt Guarantee Program investment portfolio
funds were
invested in overnight investments during the quarter.
- During 2009,
the Other Systemic Risk Reserves investment portfolio increased
from $0 on December 31, 2008, to $191.6 million on December 31, 2009,
reflecting
the receipt over the course of the year of three dividend payments
totaling $191.6 million on the $3.0 billion of Citigroup trust
preferred securities held by the DIF. As a result of an agreement executed
on
December 23, 2009 that terminated the FDIC’s guarantee against
losses on a portfolio of Citigroup assets, the entire balance
of funds held in the Other Systemic Risk Reserves investment
portfolio were
transferred to the DIF, effective December 31, 2009.
- On December
31, 2009, the FDIC collected $188.7 million in fees related to
the Transaction Account Guarantee Program under the TLGP. However,
these
funds were then immediately transferred to the Debt Guarantee
Program investment portfolio for reimbursement of claims and
expenses, so the
Transaction Account Guarantee Program investment portfolio had
no balance at year end.
The
Treasury Market
- During
the fourth quarter of 2009, most conventional Treasury yields
increased, with the largest increases seen in longer-maturity
securities. The three-month Treasury bill (T-Bill) yield actually
declined by 6 basis points, while the six-month T-Bill increased
by 2 basis points. The yield on the two-year Treasury note, which
also is very sensitive to actual and anticipated changes in the
federal funds rate, increased by 19 basis points, still reflecting
consensus forecasts for no significant changes in the federal
funds target rate over the near term. Intermediate- to longer-maturity
Treasury security yields increased more substantially; the yield
on the five-year Treasury note increased by 37 basis points,
and the yield on the ten-year Treasury note increased by 53 basis
points. Finally, the 30-year Treasury bond yield increased by
59 basis points. The conventional Treasury yield curve steepened
further during the fourth quarter. On December 31, 2009, the
two- to ten-year yield curve had a 270-basis point positive spread
(higher than the 236-basis point spread at the beginning of the
quarter). Over the past five years, this spread has averaged
93 basis points.
Prospective
Strategies
- In light
of the large cash infusion received during the fourth quarter of 2009,
the first quarter 2010 DIF investment strategy calls for purchasing
up to $25.0 billion of shorter-term Treasury securities with maturities
between April 1, 2010, and December 31, 2010. 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 securities.
- Similar
to the first quarter 2010 DIF investment strategy outlined above,
for the Debt Guarantee Program investment portfolio, staff will
consider purchasing up to $3.0 billion of Treasury securities
with maturities
between April 1, 2010, and December 31, 2010. 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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