LGIP Quarterly Newsletter |
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| Market Summary |
Financial markets continue to focus on the Federal Reserve’s tightening cycle and the U.S. Treasury’s program to reduce debt.
Through May, the data continued to reflect strength, with strong consumer spending, higher input prices, worker shortages, and increased wage pressures. With this backdrop, the FOMC voted at its May meeting to raise both the federal funds and discount rate by 50 bps to 6.50 percent and 6.00 percent, respectively. Its concern continued to focus on how the increases in demand were greater than the potential supply and that these pressures would continue.
Between the May and June meetings, various economic indicators showed some slowing in the economy. This was sufficient for the Fed to leave rates unchanged at its June 28 meeting. However, the Fed continues to believe the risk is higher that inflationary pressures will build in the foreseeable future.
Market participants are now weighing the available data to determine if the Fed is done with its tightening cycle or just taking a breather before continuing to tighten. A few believe the Fed funds rate will be at 7 percent to 7.5 percent by year's end, while others believe the Fed is done tightening. A majority believe the Fed will not tighten at the August 22 meeting and is unlikely to do so at the October meeting due to the impending presidential election.
Since our last update on April 18, the yield curve has become even more sharply inverted with yields rising sharply in the short end of the curve and declining in the longer end. Yields have increased 48, 33, and 18 bp in the 3-month, 6-month and one-year sectors, respectively, while they have decreased by 8, 20, and 26 bp in the 2-year, 5-year, and 10-year sectors, respectively, as shown in the Historical Yield Curve graph (see Figure 1, below). The rising yields in the short end of the curve are due in part to technical factors, such as increased supply, and in part are a reflection that while the market does not believe the Fed will raise rates, it does not anticipate that they will lower them anytime soon.
Throughout this period, the Dow Jones Industrial Average has continued to be volatile, dropping as low as 10,299 on May 26 and as high as 11,124 on April 25. As of August 11, it was at 11,028.
The net return on the LGIP during the second quarter of 2000 ranged from 5.95 percent to 6.38 percent. The LGIP has maintained a defensive stance due to the continued threat of Fed tightenings and as a result, 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 June 16, 2000, in the State Treasurer’s Office in Olympia.
Treasurer Murphy introduced the two new advisory committee members, Shelley Pearson and Doug Lasher.
A brief update on the net LGIP returns for March through May 2000 was given.
The fed has been in a
tightening mode, with the targeted fed funds rate at 6.50%. The LGIP has outperformed the benchmark
by 50 bp, which is wider than average due to the LGIP repricing to the targeted fed funds rate more
quickly than the index.
The Fiscal Year 2000 actual and projected expenses were reviewed with committee members. The balance of the LGIP has been higher than anticipated, resulting in more fees being collected, and the expenses are running about $900 under budget. This will result in a larger rebate.
The proposed revisions to the LGIP Investment Policy were reviewed and committee members agreed to accept the proposed revisions.
A brief update on the LGIP Web Client project was given. The internal testing of the web client is in progress, and the external testing is scheduled to begin in mid-August. The final product will be ready at WFOA in Ocean Shores in September where entities may actually sign on and access their specific information.
The public disclosure issue was clarified with committee members. When the LGIP receives a public disclosure request, they will refer the request directly to the entity who will be responsible for completing the request.
The Certificate of Achievement for Excellence in Financial Reporting was presented to the LGIP by Dean Walz, Government Finance Officers Association Representative. This was awarded to the LGIP for the LGIP’s Fiscal Year 1999 Comprehensive Annual Financial Report (CAFR).
A brief update was given on the status of the statewide custody program provided by the Bank of New York (BONY). Since the April 1, 2000 start date, three new accounts have been opened, five existing accounts have been converted to the new fee schedule, and the opening of five new accounts is anticipated.
A brief update on OST’s search for a custody and securities lending provider was given. BONY was named as the apparent successful offeror. Provided that a contract can be negotiated, BONY will begin as the provider of custody and securities lending services on October 1, 2000. Under the terms of BONY’s proposal, the LGIP’s annual custody fees will be significantly reduced, from about $142,000 to about $20,000, and annual securities lending income is estimated to be about $76,000 higher. Combining custody expenses and securities lending income, the improvement between the current and proposed contracts amounts to about $198,000 per year for the LGIP.
| LGIP Holiday Schedule for 2000 & 2001 |
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| Don’t Let Another Year Slip By... Get Your Investment Policy Certified |
In 1988 the Washington Municipal Treasurers Association (WMTA) established the Investment Policy Certification
program. Since that time 61 policies have received certification while other policies were submitted but did not
meet
the standards of the certification committee. Even if your policy does not receive certification, you are welcome to
resubmit your policy and, throughout the process, you will learn valuable information as to the vital elements that
should be addressed in a good and thorough policy.
Regardless of the size of the portfolio, an investment policy is a vital part to any investment program. An investment policy protects your entity and the investment staff. In addition, it provides a clear picture of your investment goals to the investment staff, your governing board, and your broker/dealers.
I want to thank the six member WMTA Investment Policy Certification review committee for volunteering their time and knowledge to this valuable program:
| Barbara Cory - Whatcom County | Lyman Howard - City of Kirkland |
| Andy Davidoff - Merrill Lynch | Rod Rich - City of Seattle |
| Kelly Devlin - Vining Sparks | Pat Tobin - Pierce County |
| Dick Hughes - Thurston County* |
*Though Dick is no longer on the committee due to his upcoming retirement, he did serve on the committee since its inception in 1988
Information regarding this program is available on the Office of the State Treasurer web-site at: http://tre.wa.gov/Invest/invest.htm. If you have any questions regarding the program or want information mailed to you, please call Cristin Wilson, Investment Policy Certification Chair, at 360-902-9010 or at cristin@tre.wa.gov.
| Update On Statewide Securities Custody Provider! |
In January, the Bank of New York (BONY) was selected as the statewide securities custody provider. Under the terms of the Letter of Agreement signed by BONY and the Office of the State Treasurer, BONY has agreed to provide custody services to local governments and institutions of higher education according to a set fee schedule and contract terms. BONY began offering the service in April 2000 and, to date, nine entities have joined the program, with several others indicating an interest in doing so.
If you have any questions, please contact Douglas Extine at (360) 902-9012 or at doug@tre.wa.gov.
| LGIP Web-Client |
The OST is currently conducting internal testing of the LGIP Web-Client. The Web-Client is an information-only, web-based system where LGIP participants can access account information, monthly statements, and historical data. External testing is scheduled to begin in mid-August.
If you have any questions, please contact Lisa Hennessy at (800) 331-3284 or Lisa@tre.wa.gov.
| It's A Girl! |
On Friday, May 19, 2000, Cristin Wilson, the LGIP Portfolio Manager, gave birth to a 7lb. 10oz. baby girl – Sydney Lori Wilson! Mom and baby are doing great. Cristin is taking some time off this summer to be with her new baby and will return in early September.
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LGIP Portfolio Holdings
Cost Percentage
of PortfolioRepurchase Agreements $ 1,331,680,000 38.88% U.S. Treasury Securities 56,902,750 1.66% U.S. Agency Bullets 104,951,784 3.06% U.S. Agency Generic Floaters ------ 0.00% U.S. Agency Discount Notes 1,246,639,970 36.40% Certificates of Deposit 164,800,000 4.81% Banker’s Acceptances ------ 0.00% Commercial Paper 520,289,692 15.19% Reverse Repos ------ 0.00% *Total Excluding Security Lending $ 3,425,264,196 100.00% Security Lending Holdings
Cost Repurchase Agreements $ ------ Banker’ Acceptances ------ Commercial Paper ------ Total Securities Lending $ ------ Total Investments &
Certificates of deposit$ 3,425,264,196 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 $ 164,800,000 4.81% 10% Banker’s Acceptances (BA) ------ 0.00% 20% Commercial Paper (CP) 520,289,692 15.19% 25% Securities With Higher Volatility ------ 0.00% 10% Repos Beyond 30 days ----- 0.00% 30% Aggregate BA & CP Holdings $ 520,289,692 15.19% 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 38 days 90 days Maximum Maturity 217 days 397 days Maximum Maturity of Repo 12 days 180 days Maximum Maturity or Reverse Repo 0 days 90 days Average Life of Reinvestment of Cash by Lending Agent 0 days 14 days
Repo Limits Per Dealer June 30, 2000 Total Repo
Percentage
(20% limit)Term Repo
Percentage
(10% limit)Projected
Redemptions
07/03/2000Projected
Position
07/03/2000Bank of America Securities LLC $ 291,680,000 9% 0% $ 291,680,000 ------ Bear Stearns & Co. 200,000,000 6% 6% ------ 200,000,000 CS First Boston ------ 0% 0% ------ ------ Chase Manhatten ------ 0% 0% ------ ------ Donaldson, Lufkin & Jenrette Securities 440,000,000 13% 0% 440,000,000 ------ HSBC Markets ------ 0% 0% ------ ------ Lehman Brothers Inc. ------ 0% 0% ------ ------ Merrill Lynch & Co., Inc. ------ 0% 0% ------ ------ Morgan Stanley ------ 0% 0% ------ ------ Paine Webber Inc. 200,000,000 6% 6% ------ 200,000,000 Prudential Securities 200,000,000 6% 6% ------ 200,000,000 Salomon-Smith Barney ------ 0% 0% ------ $ ------ State Street Bank ------ 0% 0% ------ ------ Total $ 1,331,680,000 $ 731,680,000 $ 600,000,000
Issuer Limitations
**Commercial Paper Cost Percentage
(5% limit)Rating
(A1/P1 or Better)Quincy Capital $ 59,508,750 1.7% A1+/P1 Charta Corp 59,343,000 1.7% A1/P1 Eureka Securities Inc. 44,619,925 1.3% A1+/P1 Edison Asset Sec 59,386,800 1.7% A1+/P1 Aspen Funding Corp. 59,528,433 1.7% A1+/P1 Ciesco LP 59,388,667 1.7% A1+/P1 Bavaria Univ. 59,672,000 1.7% A1+/P1 Receivable Cap 59,529,867 1.7% A1+/P1 Corporate Asset Funding 59,312,250 1,7% A1+/P1 Total
$ 520,289,692 15.2% Banker’s Acceptances No Banker’s Acceptance holdings as of 06/30/2000.
** 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
June 30, 2000
Assets Investments, at amortized cost: Repurchase Agreements $ 1,331,680,000 U.S. Agency securities 1,351,591,754 U.S. Treasury securities 56,902,750 Commercial Paper 520,289,692 Total excluding Securities Lending &
Securities Purchased But Not Settled$ 3,260,464,196 Total Investments (Settlement Date Basis) $ 3,260,464,196 Due from Brokers - Securities Purchased But Not Settled,
at amortized cost:U.S. Agency securities 445,578,396 Total Due from Brokers $ 445,578,396 Total Investments (Trade Date Basis) 3,706,042,592 Certificates of Deposit 164,800,000 Cash 250,503 Interest receivable 9,619,041 Total Assets
$ 3,880,712,136 Liabilities Accrued expenses $ 313,609 Due to Brokers 445,578,396 Total Liabilities
$ 445,578,396 Net Assets $ 3,434,820,131 Participant Net Asset Value, Price per Unit $ 1.00 Total Amortized Cost - Settlement Date Basis $ 3,425,264,196
| Total investment purchases: | $ | 35,297,517,362 | ||
| Total investment sales: | $ | 58,437,883 | ||
| Total investment maturities: | $ | 34,760,450,216 | ||
| Total net income: | $ | 53,857,410 | ||
| Net of realized gains and losses: | $ | 3,812 | ||
| Net Portfolio yield (360-day basis): | ||||
| April | 5.9482% | |||
| May | 6.1052% | |||
| June | 6.3786% | |||
| Average weighted days to maturity: | 38 days | |||
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Average Net Rate of Return of Government Only/Institutional Only Money Market Funds, Money Market Insight, iMoneyNet, Inc., Westborough, 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 iMoneyNet, Inc., 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 45.9 basis points. This translates into the LGIP earning $65.66 million over what the average comparable private money fund would have generated.
*Formerly IBC Financial Data
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