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6.B. - Page 2 of 39 ANALYSIS The attached investment report indicates that as of September 30, 2019, funds (excluding cash with fiscal agents) from all sources were producing an annual earnings rate of 2.36 percent. The market value of the portfolio as of September 30 was $261,695,087. 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 of $164,088,342. As of September 30, the portfolio was earning an annual yield at cost of 2.38 percent, and the yield at market was 1.79 percent. 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 September 30, 2019. The portfolio strategy continues to keep duration in line with the benchmark because of growing certainty that the Federal Reserve (Fed) would cut rates multiple times. Maintaining durations, despite the inverted yield curve (where long-term yield rates are lower than short-term rates), continues to be vital as the continued drop in yields drove strong fixed income returns. Longer -duration strategies outperformed shorter ones for the fourth quarter in a row. The sector allocation strategy continued to favor broad diversification to the widest range of permitted investments. Corporates and asset-backed securities (ABS) generally offset the negative relative performance of agencies. Corporate bonds rallied as a temporary lull in the trade war mitigated some of the imminent risk to the economy, and as a result, investment-grade corporates generated attractive excess returns. PFM's focus remained on issuers with lower leverage and less relative exposure to international trade risks. There was also an increase in volume of municipal bonds issuance, making some taxable municipal securities attractive relative to corporates. The Federal Reserve (Fed) dropped the target rate by 25 basis points in September and again in October 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. The Fed's monetary policy affects longer-term interest rates, prices of equities, business investment, household spending, employment, and inflation, and has a direct impact to the City's portfolio. These reductions have a direct impact on the interest earnings, as newer investments will earn less than the current holdings. The December policy meeting kept the Fed funds rate in the range of 1.5 percent to 1.75 percent, and signaled no plans to change rates in 2020. Page 2 of 4 City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.org 48 Redwood City 0.89% 2.41% 2.54 1.79% 2.78years BofA ML 1-5 year U.S. 0.75% 2.18% 2.56 1.64% 2.74 years Treasury Index The portfolio strategy continues to keep duration in line with the benchmark because of growing certainty that the Federal Reserve (Fed) would cut rates multiple times. Maintaining durations, despite the inverted yield curve (where long-term yield rates are lower than short-term rates), continues to be vital as the continued drop in yields drove strong fixed income returns. Longer -duration strategies outperformed shorter ones for the fourth quarter in a row. The sector allocation strategy continued to favor broad diversification to the widest range of permitted investments. Corporates and asset-backed securities (ABS) generally offset the negative relative performance of agencies. Corporate bonds rallied as a temporary lull in the trade war mitigated some of the imminent risk to the economy, and as a result, investment-grade corporates generated attractive excess returns. PFM's focus remained on issuers with lower leverage and less relative exposure to international trade risks. There was also an increase in volume of municipal bonds issuance, making some taxable municipal securities attractive relative to corporates. The Federal Reserve (Fed) dropped the target rate by 25 basis points in September and again in October 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. The Fed's monetary policy affects longer-term interest rates, prices of equities, business investment, household spending, employment, and inflation, and has a direct impact to the City's portfolio. These reductions have a direct impact on the interest earnings, as newer investments will earn less than the current holdings. The December policy meeting kept the Fed funds rate in the range of 1.5 percent to 1.75 percent, and signaled no plans to change rates in 2020. Page 2 of 4 City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.org 48