 Fourth Quarter 1999 |
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| Market Summary |
Financial markets continue to focus on the economy and the intentions of the Federal Reserve. The continued strength of the economy has reinforced the FOMC’s resolve to preempt any indication of inflation by tightening monetary policy. Although inflation has remained tame, as a result of “Fed speak,” the bond market has entered a bearish trend with rates heading higher.
The FOMC followed through on the tightening bias they assumed at the October meeting and raised the targeted federal funds rate 25 basis points to 5.50% at their November 16 meeting. In addition, the FOMC returned to a neutral bias at that time. The FOMC cited that this increase “should markedly diminish the risk of inflation going forward.” Most market participants interpreted this to mean that the Fed would remain on hold for the remainder of 1999, which they did. At their December 21 meeting, the FOMC left rates unchanged and kept the neutral bias in preparation for “market uncertainties associated with the century date change.” As we all know, Y2K was a non-event. Currently, most, if not all, market participants expect the Fed to raise the fed funds rate by 25 basis points at their February meeting.
Since our last update on October 18, the yield curve has flattened further as rates in the 3-month to 1-year sector increased more than longer-term rates. Yields have risen 33 to 64 basis points across the curve, as shown in the Historical Yield Curve graph (see Figure 1, below). Throughout this period, the Dow Jones Industrial Average reversed its downward direction and climbed to a new high of 11,497 on December 31. It is currently struggling to remain above 11,000, closing at 11,252 on January 21.
The net return on the LGIP during the fourth quarter of 1999 ranged from 5.27% to 5.51%. The LGIP has maintained a defensive stance due to the threat of the Fed tightening. Since this threat is still imminent, the LGIP is positioned to re-price quickly in response to a Fed move.
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| Summary of Advisory Committee Meeting |
he
LGIP Advisory Committee met on January 28, 2000, in the State
Treasurer’s Office in Olympia. The Statewide Custody Evaluation Team was also present
at this meeting. A brief overview of the process for the selection of the statewide
securities custody service provider was given. The evaluation team members met before the
advisory committee meeting and unanimously voted to recommend Bank of New York as the
statewide securities custody service provider. It was moved and seconded to adopt the
recommendation of the evaluation team. The motion was unanimously accepted. It was
explained that though the recommendation for Bank of New York to be the statewide
custodian has been accepted, their official capacity is pending successful contract
negotiations. At this point, Bank of New York is the “Apparent Successful Vendor.
A brief update on the net LGIP returns for September through December 1999 was given. The net return of the LGIP versus the Donoghue was very solid and outperformed the benchmark by 50 basis points. The LGIP has an average life of approximately 35 days and is ready to re-price quickly in the event of a Fed tightening at their February meeting.
OST and The State Investment Board (SIB) will conduct their own selection process for custodial services. State Street Bank has made an offer to SIB for a two-year contract extension. They have also sent a letter to OST offering to extend OST’s contract, but it appears OST will begin the custodial search process.
A brief report on the LGIP budget for fiscal years 1999 and 2000 was given. The expenses are right on target through December 1999. Due to the higher than anticipated average balance in the LGIP, the estimated rebate for FY 2000 is $420,000, approximately $75,000 more than expected.
OST will coordinate the public finance track again this year for the WFOA conference. OST anticipates having a class on the statewide custody program and a block of classes for Debt Management and Investments.
A brief update was given on the Treasury Management System (TM$) project. The web-client information portion is scheduled to begin March 1, and will be inquiry-based for the retrieval of statements and other LGIP information. The system will be password protected. Committee members who volunteered to help in the design process were Dan Underwood, Mark Wyman, and Judy Menish.
| LGIP Holiday Schedule for 2000 |
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| Year 2000... We Made It! |
We made it to the Year 2000 and, as you know, it was a non-event. The Office of the State Treasurer (OST) is very fortunate to have an excellent Information Systems staff who spent many hours throughout 1999, and over the New Year’s weekend, ensuring that OST did not have any problems. Thank you to our Information Systems staff and to the local governments who kept us informed on their month-end plans in order for us to plan for the cash flows in the LGIP.
| WFOA 2000 - Public Finance Track “Seeds for the Future” |
It is not too early to start planning for the Washington Finance Officer’s Association (WFOA) conference in September 2000 in Ocean Shores. As with WFOA ’99, the Office of the State Treasurer (OST) has been asked to coordinate the Public Finance track for this year’s conference.
In addition to debt management and cash management classes, the public finance track in 1999 incorporated investment classes which started with the basics and built into more advanced topics. Similarly, OST would like to include a range of debt and investment classes, as well as an introduction and explanation of Washington’s new statewide custody contract at the 2000 conference.
If you have any suggestions or requests regarding the Public Finance track for WFOA 2000, please contact Cristin Wilson at 360-902-9010 or at cristin@tre.wa.gov.
| Announcement of Statewide Securities Custody Provider! |
Congratulations to Bank of New York as being named Washington State’s Statewide Securities Custody Provider. Bank of New York has been involved in the statewide custody search process since October 1999 when they submitted their Offering Document. They proceeded to the Request for Proposal phase of the process and participated in collaborative sessions with the Evaluation Team and other vendor finalists. The model contract should be available for use by local governments by April 1, 2000.
This was a groundbreaking process that the Office of the State Treasurer and the Evaluation Team are proud of and they feel confident in the level of service and the affordability of the statewide custody services. If you have any questions, please contact Douglas Extine at (360) 902-9012 or at doug@tre.wa.gov.
| Thank You To The Evaluation and Review Teams! |
We want to take this opportunity to send a special thanks to our Evaluation and Review Teams for the time they committed to making the Statewide Custody search a success. The role of the Evaluation Team involved assisting in the development of the RFI and RFP documents, evaluating vendor responses, participating in collaborative sessions and site visits with potential vendors, and in making the final recommendation to the State Treasurer. The time commitment for the Evaluation Team was substantial and their efforts paid off. The five members of the Evaluation Team are:
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Washington State Local Government
Investment Pool
Position and Compliance Report
as of December 31, 1999
(Settlement Date Basis)
LGIP Portfolio Holdings
Cost Percentage
of PortfolioRepurchase Agreements $ 604,091,000 20.07% U.S. Treasury Securities 204,632,234 6.80% U.S. Agency Bullets 224,872,658 7.47% U.S. Agency Generic Floaters ------ 0.00% U.S. Agency Discount Notes 1,592,394,842 52.92% Certificates of Deposit 110,600,000 3.67% Banker’s Acceptances ------ 0.00% Commercial Paper 273,062,925 9.07% Reverse Repos ------ 0.00% *Total Excluding Security Lending $ 3,009,653,658 100.00% Security Lending Holdings
Cost Repurchase Agreements $ ------ Banker’ Acceptances ------ Commercial Paper ------ Total Security Lending $ ------ Total All Assets
$ 3,009,653,658 Policy Limitations
The policy limitations include investment of cash collateral by a securities lending agent calculated as percentages of the portfolio holdings Total Excluding Security Lending.*
Size Limitations Holdings Percentage
of PortfolioPolicy Limitations
PercentageCertificates of Deposit $ 110,600,000 3.67% 10% Banker’s Acceptances (BA) ------ 0.00% 20% Commercial Paper (CP) 273,062,925 9.07% 25% Securities With Higher Volatility ------ 0.00% 10% Repos Beyond 30 days ------ 0.00% 30% Aggregate BA & CP Holdings $ 273,062,925 9.07% 35%
Leverage (30% total Limit)Securities on Loan (dollars out on loan) $ ------ Reverse Repos ------ Total Leverage $ ------ 0.00%
Maturity Limitations Currently Policy Limitations Portfolio Average Life 57 days 90 days Maximum Maturity 314 days 397 days Maximum Maturity of Repo 3 days 180 days Maximum Maturity or Reverse Repo 0 days 90 days Average Life of Reinvestment of Cash by Lending Agent 3 days 14 days
Repo Limits Per Dealer December 31, 1999 Total Repo
Percentage
(20% limit)Term Repo
Percentage
(10% limit)Projected
Redemptions
01/03/2000Projected
Position
01/03/2000Bank of America Securities LLC $ 284,091,000 9% 0% $ 284,091,000 ------ Bear Stearns & Co. ------ 0% 0% ------ ------ CS First Boston ------ 0% 0% ------ ------ Chase Manhatten ------ 0% 0% ------ ------ Donaldson, Lufkin & Jenrette Securities 220,000,000 7% 0% 220,000,000 ------ HSBC Markets ------ 0% 0% ------ ------ Lehman Brothers Inc. ------ 15% 0% ------ ------ Merrill Lynch & Co., Inc. ------ 0% 0% ------ ------ Morgan Stanley ------ 0% 0% ------ ------ Paine Webber Inc. ------ 5% 5% ------ ------ Prudential Securities ------ 3% 0% ------ ------ Salomon-Smith Barney 100,000,000 3% 0% 1000,000,000 $ ------ State Street Bank ------ 0% 0% ------ ------ Total $ 604,091,000 $ 604,091,000 $ ------
Issuer Limitations
**Commercial Paper Cost Percentage
(5% limit)Rating
(A1/P1 or Better)Corp Receivables $ 29,835,958 1.0% A1+/P1 Corp Assets Fdg 29,726,375 1.0% A1+/P1 Quincy Capital 29,753,367 1.0% A1+/P1 Eureka Securitization Fdg 29,758,000 1.0% A1+/P1 Windmill Funding 24,824,896 0.8% A1+/P1 Monte Rosa Cap 24,829,167 0.8% A1+/P1 Receivables Cap 29,813,333 1.0% A1+/P1 Kitty Hawk Fdg 24,849,896 0.8% A1+/P1 Altair Fdg 19,866,800 0.7% A1+/P1 Ciesco Lp 29,805,133 1.0% A1+/P1 Total
$ 273,062,925 9.1% Banker’s Acceptances No Banker’s Acceptance holdings as of 12/31/1999.
** These are the limitations of the formal Investment policy. However, operating guidelines place limits of 3% per issuer.
Local Government Investment Pool STATEMENT OF NET ASSETS
December 31, 1999
Assets Investments, at amortized cost: Repurchase Agreements $ 604,091,000 U.S. Agency securities 1,817,267,500 U.S. Treasury securities 204,632,234 Commercial Paper 273,062,925 Total excluding Securities Lending &
Securities Purchased But Not Settled$ 2,899,053,658 Securities Lending Investments, at amortized cost: ------ Total Securities Lending ------ Total Investments (Settlement Date Basis) $ 2,899,053,658 Due from Brokers - Securities Purchased But Not Settled, at amortized cost: ------ Total Due from Brokers $ ------ Total Investments (Trade Date Basis) 2,899,053,658 Certificates of Deposit 110,600,000 Cash 256 Interest receivable 20,656,780 Total Assets
$ 3,030,310,694 Liabilities Accrued expenses $ 189,614 Obligations under securities lending agreement ------ Due to Brokers ------ Total Liabilities
$ 189,614 Net Assets $ 3,030,121,081 Participant Net Asset Value, Price per Unit $ 1.00 Total Amortized Cost - Settlement Date Basis $ 3,009,653,658
| Total investment purchases: | $ | 23,885,437,366 | ||
| Total investment sales: | $ | 59,730,994 | ||
| Total investment maturities: | $ | 24,018,615,092 | ||
| Total net income: | $ | 44,178,663 | ||
| Net of realized gains and losses: | $ | 41,144 | ||
| Net Portfolio yield (360-day basis): | ||||
| October | 5.2679% | |||
| November | 5.3299% | |||
| December | 5.5084% | |||
| Average weighted days to maturity: | 57 days | |||
| Net
Rate of Return Fiscal Years 1995 – 2000 (to date)  |
Average Net Rate of Return of Government Only/Institutional Only Money Market Funds, Money Market Insight, IBC Donoghue, Inc., Ashland, MA
NOTE: Rates are calculated on a 360-day basis.
The above comparison shows how the LGIP has performed relative to its benchmark since July 1994. This benchmark is the IBC Donoghue Government Only/Institutional Only Money Market Funds, which is comprised of privately managed money market funds similar in composition and investment guidelines to the LGIP.
The LGIP net rate of return has outperformed its benchmark since July 1994 by an average of 45.4 basis points. This translates into the LGIP earning $57.72 million over what the average comparable private money fund would have generated.
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