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6.A. - Page 2 of 44 ANALYSIS The attached investment report indicates that as of June 30, 2019, funds (excluding cash with fiscal agents) from all sources were producing an annual earnings rate of 2.41%. The market value of the portfolio as of June 30 was $286,840,802. This includes the funds held in the San Mateo County Treasurer's investment pool and with the State Treasurer's investment pool. All of these investments comply with the City's investment policy. The City has sufficient liquid resources available to meet expenditure requirements for the next six months. The portion of the City's portfolio that is managed by PFM has a total market value at quarter end of $162,166,077. As of June 30, the portfolio was earning an annual yield at cost of 2.42%, and the yield at market was 1.9%. The average maturity of the portfolio was 2.78 years. The market benchmark, selected with consultation from the City Council Finance/Audit Subcommittee, is the Bank of America Merrill Lynch (BofA ML) 1-5 year U.S. Treasury Index. Below is a table summarizing the City's portfolio performance compared to the benchmark, for the period ending June 30, 2019. The portfolio strategy of keeping the duration in line with the benchmark despite the inverted yield curve (where long-term yield rates are lower than short-term rates) drove strong market -value returns across most fixed-income sectors, as market prices on those tend to rise as yields fall. U.S. Treasury yields fell for a third consecutive quarter, with maturities beyond one year falling 40-50 basis points. As of June 30, yields on the majority of benchmark U.S. Treasury Maturities were near 18 -month lows. The S&P 500 returned 4.3% for the second quarter and 17.4% for the first half of 2019, marking its best first-half performance in over 20 years. The Federal Reserve (Fed) kept the Fed funds rate unchanged at its May and June meetings, but dropped the target rate by 25 basis points at its July meeting due to implications of global developments (such as the trade tensions with China and lower global growth), as well as slower GDP growth and below target inflation in the second quarter. The market now widely expects multiple rate cuts in the second half of 2019. This is a significant change from a year ago when the market held an expectation of three to four interest rate increases in 2019. The anticipated reduction of rates will have a direct impact on the interest earnings in the City's portfolio, as newer investments will earn less than the current holdings. Fed Chair Jerome Powell affirmed that the Fed will "act as appropriate to sustain the expansion," and acknowledged that acting preemptively to cut rates in light of a possible slowdown may be best for the economy. Looking ahead, PFM's risk mitigation strategy for the City's portfolio includes continued diversification in the investment grade sectors and keeping distribution of maturities and duration in line with the benchmark. Because of the outlook for slower economic growth, PFM will favor higher -grade fixed- income sectors including callable agencies for their incremental yield (although the downward move in City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.org 6