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

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II. Investments Results - Fourth Quarter 2010

DIF Investment Portfolio

  • The amortized cost (book value) of the DIF investment portfolio decreased by $19.8 billion during 2010, or by 33.4 percent, from $59.3 billion on December 31, 2009, to $39.5 billion on December 31, 2010.  Similarly, the DIF portfolio’s primary reserve (total market value including accrued interest) decreased by $19.9 billion, or by 33.4 percent, from $59.5 billion on December 31, 2009, to $39.6 billion on December 31, 2010.  During the year, resolution outlays and operating expenses greatly exceeded receivership payments, assessment collections, and other inflows.
  • The DIF investment portfolio’s total return for 2010 was 0.20 percent, 502 basis points lower than the 5.22 percent total return of its benchmark, the Merrill Lynch 1-10 Year Treasury Index (Index).  Given that most longer-maturity Treasury yields declined (that is, Treasury security prices rose) over the full one-year period, the DIF portfolio’s large balances of comparatively low yielding overnight investments and short-maturity Treasury securities were a drag on performance relative to the Index’s longer-duration conventional Treasury securities.
  • In accordance with the approved fourth 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 seven short-maturity Treasury securities on two occasions during the fourth quarter of 2010. The seven securities had a total par value of $6.0 billion, a weighted average yield-at-cost of 0.28 percent, and a weighted average maturity (WAM) of 0.81 years (a little under 10 months). 

Other Corporate Investment Portfolios

  • On December 31, 2010, the Debt Guarantee Program (DGP) investment portfolio stood at $6.6 billion (total market value), an increase from $6.4 billion on December 31, 2009.  During 2010, although the DGP reimbursed a net amount of $273 million to the DIF for claims against the Transaction Account Guarantee (TAG) Program, the DGP received a total of $481 million in reimbursements from TAG Program assessments during the period, hence the net increase in the DGP portfolio.  In accordance with the approved fourth quarter 2010 investment strategy for the DGP portfolio, staff purchased four short-maturity Treasury securities during the fourth quarter of 2010.  The securities had a total par value of $1.0 billion, a weighted average yield-at-cost of 0.30 percent, and a WAM of 0.85 years (a little over 10 months).
  • During 2010, as mentioned above, the FDIC collected about $481 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 December 31, 2010.

The Treasury Market

  • During the fourth quarter of 2010, short-maturity T-Bill yields were little changed while longer-maturity Treasury yields posted dramatic increases.  The three-month T-Bill yield decreased by 3 basis points, while the yield on the six-month T-Bill decreased by 1 basis point.  The one-year T-Bill yield increased by 1 basis point.  The two-year Treasury note yield, which is sensitive not only to actual as well as anticipated changes in the federal funds rate, but also to changes in investor sentiment, increased by 17 basis points. Intermediate- to longer-maturity Treasury security yields increased considerably during the fourth quarter.  The yield on the five-year Treasury note increased by 75 basis points, while the yield on the ten-year Treasury note increased by 78 basis points.  The conventional Treasury yield curve remained relatively steep during the fourth quarter of 2010.  On December 31, 2010, the two-year to ten-year yield curve had a 270-basis point positive spread (higher than the 209-basis point spread at the beginning of the quarter).  Over the past five years, this spread has averaged 135 basis points.

Prospective Strategies

  • Similar to the fourth quarter 2010 investment strategy, the first quarter 2011 DIF investment strategy calls for purchasing up to $20.0 billion of short-term Treasury securities with maturities between April 1, 2011, and December 31, 2013.  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. The maturity dates eligible for investment were extended from December 31, 2011, to December 31, 2013, so as to take advantage of the recent increases in Treasury yields.
  • For the Debt Guarantee Program, the first quarter 2011 investment strategy calls for purchasing up to $3 billion (par value) of available-for-sale securities with maturity dates between April 1, 2011, and December 31, 2013.  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.  The maturity dates eligible for investment were extended from December 31, 2011, to December 31, 2013, so as to take advantage of the recent increases in Treasury yields.




Last Updated 12/13/2010 dofbusinesscenter@fdic.gov

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