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

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Executive Summary

   •  Summary Trends and Results
I. Corporate Fund Financial Results

   •  DIF Balance Sheet
   •  DIF Income Statement
   •  DIF Statements of Cash Flows
   •  FRF Selected Financial Data
 II. Investments Results & Prospective Strategies

   •  Deposit Insurance Fund Portfolio Summary
   •  Approved Investment Strategies
III. Budget Results

   •  Budget & Expenditures by Major Expense Categories
   •  Budget & Expenditures by Budget Component, Division & Office
Printable Version

II. DIF Investments Results - Second Quarter 2008

DIF

  • The amortized cost (book value) of the DIF investment portfolio decreased by $41 million or by 0.08 percent—from $50.469 billion on December 31, 2007, to $50.428 billion on June 30, 2008. The DIF portfolio’s market value increased by $95 million or by 0.18 percent, from $52.378 billion on December 31, 2007, to $52.473 billion on June 30, 2008.
  • The DIF investment portfolio's total return for the first half of 2008 was 2.659 percent, approximately 30 basis points more than its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which had a total return of 2.362 percent during the same period. Despite the DIF portfolio’s large cash balance, which acted as a drag on total return performance, the DIF portfolio’s Treasury Inflation-Protected Securities (TIPS) had significantly higher returns than the Index’s conventional Treasury securities, hence the overall portfolio outperformance.
  • During the second quarter of 2008, consistent with the approved quarterly DIF portfolio investment strategy, staff deferred purchases of Treasury securities in light of expected and potential resolution funding requirements and the comparatively low Treasury yields. On June 30, 2008, the DIF portfolio’s overnight investment balance was $9.255 billion, well above its $150 million target floor balance.

The Treasury Market

  • During the second quarter of 2008, conventional Treasury yields increased dramatically, with the two-year Treasury note posting the most significant increase. The yield increases appeared to reflect a number of factors, including concerns over potentially accelerating inflationary pressures and rising inflation expectations, an unwinding of so-called flight-to-quality trades as the recent financial market turmoil appeared to have mitigated, and a strong consensus opinion that the Federal Reserve is at or near the end of its easing cycle. During the second quarter of 2008, yields on three-month and six-month T-Bills increased by 41 basis points and 67 basis points, respectively. The two-year note yield, which is also sensitive to actual as well as anticipated changes in the federal funds rate, increased significantly by 104 basis points, again, indicating that the Federal Reserve may be at or near the end of its easing cycle. Intermediate-maturity Treasury yields also increased over the course of the quarter. The yield on the five-year Treasury note increased by 89 basis points; the yield on the ten-year Treasury note increased by 56 basis points. The conventional Treasury yield curve flattened during the second quarter of 2008; on June 30, 2008, the two-year to ten-year yield curve had a 135-basis point positive spread (compared to positive 183-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 92 basis points.
  • During the second quarter of 2008, Treasury Inflation-Protected Securities’ (TIPS) real yields increased, although generally to a lesser extent than comparable maturity conventional Treasury securities because of rising inflation expectations. For example, the real yield on the five-year TIPS maturing on July 15, 2013, increased by 33 basis points. The real yield on the 10-year TIPS maturing on January 15, 2017, increased by 34 basis points.

Prospective Strategies

  • The current DIF investment strategy calls for placing all net proceeds from deposit insurance assessments, maturing securities, coupon and other interest payments, and receivership dividends into overnight investments in anticipation of possibly needing the funds for resolution activities. (See attached Approved Investment Strategy.)

 



Last Updated 09/15/2008 dofbusinesscenter@fdic.gov