LGIP Quarterly Newsletter |
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| Market Summary |
here
was uncertainty in the market throughout October but November and December’s economic
data brought increased concerns of a slowing economy. The rising trend in jobless claims, the
drop in Gross Domestic Product (GDP) growth, and the drop in inflation indications were all
data contributing to these concerns. As expected, the Federal Open Market Committee (FOMC)
moved to an easing bias at its December 19 meeting. However, on January 3, in an unexpected
inter-meeting move, the Fed dropped the fed funds rate by 50 basis points (bp) to 6.00% and the
discount rate by 25 bp to 5.75%. The following day, the Fed further cut the discount rate by
25 bp to 5.50%. In its statement, the Fed cited, “further weakening of sales and production,
and in the context of lower consumer confidence, tight conditions in some segments of financial
markets, and higher energy prices sapping household and business purchasing power. Moreover,
inflation pressures remain contained.” The next FOMC meeting is January 31 and most market
watchers feel there are more rate cuts to come.
Much of the excitement in October revolved around tensions in the Middle East causing oil prices to skyrocket. Iraq was threatening its neighbors and threatened to discontinue oil exports. As a result, the oil price index hit a high of 98.07 on October 12. These rapidly deteriorating conditions in the Middle East and in equity markets caused a flight-to-quality, especially in the short-end of the end of the curve.
Since our last update on October 20, the yield curve continues its inversion as investors expect rates to further decline. The rally across the entire curve has been nothing short of amazing. Yields have decreased 107, 118, and 114 basis points (bp) in the 3-month, 6-month and 1-year sectors, respectively, while they have decreased by 109, 85, and 46 bp in the 2-, 5-, and 10-year sectors, respectively, as shown in the Historical Yield Curve graph (see Figure 1, below). This impressive move has been caused, in part, by weak financial data, talk of an economic recession, the threat of further fed action, and flight-to-quality from the stock market.
Throughout this period, the Dow Jones Industrial Average was very volatile, dropping as low as 10,226 on October 20, with its high close on November 5 at 10,977. The Dow closed on January 19 at 10,587. Since our last update, the NASDAQ got hammered, peaking at 2,441 on October 20 and dropping to a low of 2,291 on January 2. The Fed’s move on January 3 touched off a record 14.17% rise in the NASDAQ; however, this gain was followed by more sporadic trading. The NASDAQ closed on January 19 at 2,770.
The net return on the LGIP during the fourth quarter of 2000 ranged from 6.44% to 6.46%. Currently, there are no investment opportunities that are providing positive carry (i.e. yields above the fed funds rate of 6.00%). The LGIP has extended its average life in anticipation of further fed eases. In an easing environment, the LGIP wants to have a longer average life in order to preserve its yield and thus lag the easing in rates. Despite this extension, the LGIP is positioned to provide adequate liquidity to LGIP participants and take advantage of any cheapness in the yield curve.
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| Summary of Advisory Committee Meeting |
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LGIP Advisory Committee met on December 12, 2000, in the State Treasurer’s Office in Olympia.
A brief update was given on the net LGIP returns for September through November 2000. For the
last ten months, the LGIP has outperformed the benchmark by about 50 bp. The current strategy
of the LGIP is to look for opportunities to extend the average life of the portfolio, currently
at 40 days, with the outlook being that the Fed is much more likely to ease than to tighten.
Mary Carlson, Western Washington University, and Carolyn Sundby, Council of Presidents’ Office, were introduced. A brief overview of their organization and its purpose was given. A proposal was made to enable four-year universities to join the Local Government Investment Pool for the investment of surplus public funds. Since the legislation was unavailable to review because it was at the Code Reviser’s Office, a copy of Chapter RCW 43.250 was distributed to committee members. The changes in the sections relating to the proposed legislation were reviewed. Committee members agreed this would be a great benefit to the universities and have a net positive impact on current participants. The operational costs of the extra participants would be minimal and extra fees generated should more than cover the additional costs, thereby reducing the net fee paid by current participants. The committee unanimously agreed to approve this proposal. A copy of the proposed legislation will be mailed to all committee members.
A brief update on the LGIP Web-Client was given. Currently, there are 177 entities signed up to participate and 427 log-on IDs. A tracking system will be maintained in the Information Technology section, and a Web-Client counter is being implemented to monitor entities that access the site. There have been some problems with participants signing on, so help procedures are being developed. The LGIP will contact the entities for feedback.
A brief report was given on Phase III of the TM$ project, which includes LGIP Administration, LGIP Transactions and Investment Accounting. It should be implemented in the second half of 2001. In March, OST will be asking for volunteers from the advisory committee to serve as Beta testers for the LGIP Transactions portion of Phase III. Participants will receive confirmation numbers after their transactions are made.
A brief update was given on the Statewide Custody Program as outlined in the handout provided to committee members. It has been a slow process, but there has been positive feedback. An update on the OST Custody Program was given. The conversion took place on October 1 and went very smoothly, and the Bank of New York has been very responsive to OST’s needs.
A brief update was given on TM$ access and security. The LGIP Web-Client can now be accessed through the OST home page, a more user-friendly way to access it.
| LGIP Holiday Schedule for 2001 |
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| A Message from Treasurer Murphy |
wo large California utilities, Southern California Edison and Pacific Gas & Electric, defaulted
on their commercial paper (CP) in January 2001. The defaults were shocking because the paper
had been A-1/P-1, or top-tier rated, less than one month prior to the defaults. Orange County,
California, was holding $40 million worth of the CP at the time of the default, according to
news stories. Riverside County, which is nearby, was also holding a like amount of the
utilities’ CP. The Texas LGIP was also reported to be holding $20 million of the paper.
I want to take this opportunity to assure you that the LGIP does not hold any investments in California utilities.
Further, two aspects of the recent California utilities’ defaults have caused me to reconsider the risk-reward ratio CP currently offers. In little more than a month, the utilities’ debt rating went from investment grade to junk and into default. The absence of meaningful warning of the actual financial condition of the companies has significantly diminished my confidence in short-term credit ratings. An additional concern is the willingness of backup line-of-credit providers to raise the safety net CP investors have been led to expect in such circumstances. In short, the defaults make me think the risks of CP are significantly greater than previously thought. Accordingly, we have reduced our commercial paper program significantly.
Commercial paper continues to be an authorized investment for the LGIP and for the State Treasury. We expect to re-enter the market when its risk-reward ratio appears attractive.
| Update on the LGIP Web-Client |
So far 201 entities have signed up for the Web-Client, creating 479 logon-IDs. The Web-Client is a great way to access your interest earnings information over the past 12 months, obtain a copy of your last month’s statement, get the current balance in your account, in addition to much more information. A new and easier way to access the Web-Client was installed; just sign on to the Washington State Treasurer’s Office home page http://tre.wa.gov/, select the LGIP option and once in the LGIP Web page select the first item, LGIP Web Client Link.
Please remember to complete the Web-Client authorization form if you have personnel changes and need to add or delete users. If you have not yet completed the Web-Client Logon Authorization Form to establish your logon, you can either copy the form from the LGIP Web page or contact Tracie Kier, LGIP Administrator, at tracie@tre.wa.gov or 800-331-3284.
As you know, we have been working on getting your files up-to-date and requested you to complete and return the updated LGIP Transaction Authorization Form. The forms have been flooding in and we would like to thank you for your cooperation.
| WMTA Web Site |
Attention all internet users! The Washington Municipal Treasurers Association (WMTA) has developed a Web site and it can be reached at: http://www.wmta-online.com/.
Access the site to get information on the WMTA Board, upcoming conferences and events, the Investment Policy Certification Program, the WMTA Money Clip newsletter, and links to other useful sites for city and county officials.
Thank you to Steve Kimble from the East Columbia Basin Irrigation District for his hard work in developing and monitoring the site. If you have questions, concerns or suggestions regarding the WMTA Web site, contact Steve at ecbid@ecbid.org or at (509) 488-9671.
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Washington State Local Government
Investment Pool
Position and Compliance Report
as of December 31, 2000
(Settlement Date Basis)
LGIP Portfolio Holdings
Cost Percentage
of PortfolioRepurchase Agreements $ 820,841,000 21.10% U.S. Treasury Securities 435,577,061 11.19% U.S. Agency Bullets 339,547,075 8.73% U.S. Agency Generic Floaters ------ 0.00% U.S. Agency Discount Notes 1,387,774,433 35.67% Certificates of Deposit 130,850,000 3.36% Banker’s Acceptances ------ 0.00% Commercial Paper 776,452,751 19.95% Reverse Repos ------ 0.00% *Total Excluding Securities Lending $ 3,891,042,320 100.00% Securities Lending Holdings
Cost Repurchase Agreements $ 279,332,848 Banker’ Acceptances ------ Commercial Paper ------ Total Securities Lending $ 279,332,848 Total Investments &
Certificates of Deposit$4,170,375,168 Policy Limitations
The policy limitations include investment of cash collateral by a securities lending agent calculated as percentages of the portfolio holdings Total Excluding Securities Lending.*
Size Limitations Holdings Percentage
of PortfolioPolicy Limitations
PercentageCertificates of Deposit $130,850,000 3.36% 10% Banker’s Acceptances (BA) ------ 0.00% 20% Commercial Paper (CP) 776,452,751 19.95 25% Securities With Higher Volatility ------ 0.00% 10% Repos Beyond 30 days 300,000,000 7.71% 30% Aggregate BA & CP Holdings 776,452,751 19.95 35%
Leverage (30% total Limit)Securities on Loan (dollars out on loan) 272,552,405 Reverse Repos ------ Total Leverage $272,552,405 7.00%
Maturity Limitations Currently Policy Limitations Portfolio Average Life 48 days 90 days Maximum Maturity 348 days 397 days Maximum Maturity of Repo 43 days 180 days Maximum Maturity or Reverse Repo 0 days 90 days Average Life of Reinvestment of Cash by Lending Agent 1 days 14 days
Repo Limits Per Dealer December 31, 2000 Total Repo
Percentage
(20% limit)Term Repo
Percentage
(10% limit)Projected
Redemptions
01/02/2001Projected
Position
01/02/2001Bank of America Securities LLC $ 70,841,000 2% 0% $ 70,841,000 ------ Bank of New York ------ 0% 0% ------ ------ Bear Stearns & Co. 200,000,000 5% 5% ------ 200,000,000 CS First Boston ------ 0% 0% ------ ------ Chase Manhatten ------ 0% 0% ------ ------ Daiwa Securities America Inc. 91,519,745 2% 0% 91,519,745 ------ Dresdner Securities USA ------ 0% 0% ------ ------ Lehman Brothers Inc. 190,000,000 5% 0% 190,000,000 ------ Merrill Lynch & Co., Inc. ------ 0% 0% ------ ------ Morgan Stanley 12,059,570 0% 0% 12,059,570 ------ Nomura Securities Intl Incorporated 150,108,167 4% 0% 150,108,167 ------ Paribas Corporation 25,645,366 1% 0% 25,645,366 ------ Prudential Securities ------ 0% 0% ------ ------ Salomon-Smith Barney 100,000,000 3% 3% ------ 100,000,000 UBS Warburg LLC 260,000,000 7% 5% 60,000,000 200,000,000 Total $ 1,100,173,848 $ 600,173,848 $ 500,000,000
Issuer Limitations
**Commercial Paper Cost Percentage
(5% limit)Rating
(A1/P1 or Better)WCP Funding $ 59,759,100 1.5% A 1/P1 Bavaria Univ 59,811,583 1.5% A 1/P1 Bavaria TRR 59,769,000 1.5% A 1/P1 Quincy Capital 59,545,000 1.5% A1+/P1 Corp Rec Corp 59,695,267 1.5% A1+/P1 Triple A 1 Funding 24,872,444 0.6% A 1/P1 Variable Funding 74,550,440 1.9% A 1/P1 Newport Funding 59,801,700 1.5% A1+/P1 Eureka Securitization 59,578,800 1.5% A1+/P1 Gov PP 59,602,250 1.5% A1+/P1 Sweetwater Capital Corp 49,807,792 1.3% A1+/P1 Edison Asset Securitization 59,675,500 1.5% A1+/P1 Koch Industries 89,983,875 2.3% A1+/P1 Total
$ 776,452,751 20.0% Banker’s Acceptances ------ 0.0% ------ 0.0% ------ 0.0% ------ 0.0% ------ 0.0% ------ 0.0% ------ 0.0% Total $ ------ 0.0%
** 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, 2000
Assets Investments, at amortized cost: Repurchase Agreements $ 820,841,000 U.S. Agency Coupons 339,547,075 U.S. Agency Discount Notes 1,387,774,433 U.S. Treasury securities 435,577,061 Commercial Paper 776,452,751 Total excluding Securities Lending &
Securities Purchased But Not Settled$ 3,760,192,320 Securities Lending Investments, at amortized cost: Repurchase Agreements 279,332,848 Total Securities Lending 279,332,848 Total Investments (Settlement Date Basis) $ 4,039,525,168 Total Investments (Trade Date Basis) 4,039,525,168 Certificates of Deposit 130,850,000 Cash 7,563,927 Interest receivable 6,925,613 Total Assets
$ 4,184,864,708 Liabilities Accrued expenses $ 1,389,396 Obligations under securities lending agreement 279,332,848 Total Liabilities
$ 280,722,244 Net Assets $ 3,904,142,464 Participant Net Asset Value, Price per Unit $ 1.00 Total Amortized Cost - Settlement Date Basis $ 4,170,375,168
| Total investment purchases: | $ | 23,931,596,490 | ||
| Total investment sales: | $ | 247,687,528 | ||
| Total investment maturities: | $ | 23,487,995,576 | ||
| Total net income: | $ | 62,324,873 | ||
| Net of realized gains and losses: | $ | 84,972 | ||
| Net Portfolio yield (360-day basis): | ||||
| October | 6.4431% | |||
| November | 6.4644% | |||
| December | 6.4526% | |||
| Average weighted days to maturity: | 46 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 46.2 basis points. This translates into the LGIP earning $74.12 million over what the average comparable private money fund would have generated.
*Formerly IBC Financial Data
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© 2001 [Updated: February 16, 2001] |
