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Portfolio/Benchmark <br />Total <br />Return <br />Effective <br />Duration <br />Yield at <br />Market <br />Average <br />Maturity <br />Redwood City 0.43% 2.60 1.62% 2.73 years <br />BofA ML 1-5 year U.S. Treasury <br />Index <br />0.38% <br />2.63 1.54% 2.80 years <br /> <br />Key drivers of market conditions in the second quarter of 2017 included the federal <br />reserve rate hike, mixed readings on key economic data in the U.S., persistently <br />subdued inflation readings, narrow credit spreads, and higher yields in Europe and <br />elsewhere. Short-term and long-term Treasury yields diverged during the quarter and <br />caused the yield curve to flatten, retracing all the steepening that took place following <br />the presidential election. <br /> <br />PFM’s primary strategy this quarter was to maintain “neutral” durations until May and <br />June, then allowing the duration to drift shorter, as PFM believed that the rates were not <br />adequately pricing in the likelihood of the Fed rate increase in June. Yield spreads <br />between U.S. Treasuries and Agencies remained historically tight during the quarter. <br />PFM worked to swap out the expensive Agency holdings into U.S. Treasuries at similar <br />yields, and purchase new issues mostly in the 2-3 year maturity range. The corporate <br />sector outperformed comparable-maturity Treasuries for the seventh straight quarter. <br /> <br />Looking ahead, PFM anticipates continued modest growth in the US economy, but as <br />recent economic data has been disappointing, fiscal policy initiatives have stalled, and <br />inflation remains below the Fed’s 2% target, the future path of the Fed policy is not <br />clear. PFM will continue to favor Treasuries over Agencies except in government-only <br />accounts where current holdings will be maintained. Corporate securities remain near <br />multi-year lows. PFM will be selective with regard to choice of industry and issuer, and <br />will favor shorter maturities. PFM will continue to continue to monitor incoming <br />economic data, federal policy, and sector relationships to identify market opportunities. <br /> <br />PFM has provided an in-depth market summary and discussion on their investment <br />strategy and outlook in the attached investment report. <br /> <br /> <br />ALTERNATIVES <br />The Council can ask staff to provide the investment report in a different format, or to <br />include different information; staff could return at a future Council meeting with an <br />updated report. <br /> <br /> <br />FISCAL IMPACT <br />The City’s portfolio received $699,211 in gross interest earnings over the last quarter. <br />All interest earnings are allocated monthly through a preset methodology that spreads <br />earnings to the appropriate funds. Fees for PFM’s services during this period were <br />6.1.C. - Page 2