CA Review CKM
Meeting Date: Sept. 29, 2026
To: Mayor and City Council
From: Geoff Patnoe, City Manager
Staff Contact: Christian Peacox, City Treasurer
[email protected], 442-339-5119
Subject: Annual Report of Investments for Fiscal Year 2025-26 Districts: All
Recommended Action
Accept and file Annual Report of Investments for Fiscal Year 2025-26.
Executive Summary
The City Treasurer provides an annual report to the City Council and the community on the city’s investment portfolio, as required by the city’s Investment Policy. The Annual Report of Investments (Exhibit 1) outlines the market environment influencing the city’s investment strategy, summarizes portfolio status and presents key analyses for fiscal year 2025‑26.
During the year, the investment portfolio’s par value, the face value of the investments, grew by 3.43% and generated more than $28 million in interest income, with an average yield of
3.61%, reflecting prudent management in alignment with the objectives of safety, liquidity and return.
At the Investment Review Board meeting on Aug. 24, 2026, the board reviewed and accepted the Annual Report of Investments for Fiscal Year 2025-26.
Explanation & Analysis
Objectives
The City Treasurer is tasked with overseeing investment activities for the city and its agencies by managing funds in excess of day‑to‑day operating needs. City investments are pooled and managed to meet three objectives:
1. Safeguarding principal
2. Maintaining sufficient liquidity to meet the city’s operating requirements
3. Achieving a rate of return that is commensurate with prevailing market conditions and remains fully subordinate to the objectives of preserving principal and maintaining adequate liquidity
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The first objective is the preservation of the city’s capital. Prudent investment decisions are made to protect public funds for the benefit of residents. All investments are made in accordance with the city’s Investment Policy, and current investment details are provided monthly for full transparency and review.
The second objective, liquidity, is ensured through several policy‑driven methods:
• Ensuring investments maturing within the next six months – measured at par value, or face value – plus estimated base operating revenues shall be sufficient to meet the city’s next six months of expenditure requirements.
• Monitoring portfolio’s modified duration (the change in the value of a security due to a change in interest rates, a measure of sensitivity to interest‑rate changes). • Limiting the maturity of any investment to five years from purchase settlement, with an average portfolio maturity of three years or less.
These practices maintain ready access to capital for operational needs and help avoid selling investments at a loss.
Once safety and liquidity objectives are satisfied, the third objective is to earn a reasonable rate of return. This is pursued by making investment decisions that balance market opportunities with the ongoing priority of capital preservation and sufficient liquidity.
Performance highlights for fiscal year 2025-26
Safety
• Portfolio par value increased $32.7 million from the previous fiscal year. • Book value, which is the cost value of the investments adjusted for amortized premiums and discounts, increased $34.3 million from the previous fiscal year. • At the fiscal year’s end, all corporate notes, supranational securities, mortgage pass‑through securities, and municipal bonds held a rating of A or better by at least one of the major national rating organizations.
Liquidity
• The portfolio maintained an average of $317.1 million in cash and short‑term investments (maturing within one year).
• The modified duration at the end of the fiscal year was 1.69. • Average portfolio maturity was 1.77 years (three years is the maximum average allowed.)
Return
• Portfolio weighted average yield ranged from 3.38% (start of year) to 3.86% (end of year), averaging 3.61%.
• Interest income exceeded $28 million, a 12% increase over the prior fiscal year.
Throughout the fiscal year, the city maintained a disciplined, laddered portfolio structure with staggered investment maturities to support steady cash flow, ensure liquidity and reduce interest‑rate risk. The 3.43% increase in portfolio par value reflects a positive net cash flow along with interest income. Combined, these exceeded expenditures. This is consistent with the city's long‑term financial trends. The portfolio generated a 12% increase in interest income compared with the prior fiscal year, resulting in more than $3 million in additional interest Sept. 29, 2026
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payments received. The City Treasurer continued to manage investments prudently and in alignment with the city's Investment Policy by preserving principal, maintaining adequate liquidity and earning a rate of return commensurate with prevailing market conditions while remaining subordinate to the first two objectives.
More detailed information can be found in the report attached as Exhibit 1.
Next Steps
The City Treasurer will continue to actively manage the investment program for the city and its agencies, including the Carlsbad Municipal Water District, in alignment with the objectives of safety, liquidity and return. Monthly and annual investment reports will be prepared and presented to the City Council and shared with the community to ensure transparency and ongoing accountability.
Environmental Evaluation
The proposed action is not a “project” as defined by California Environmental Quality Act, or CEQA, Section 21065 and CEQA Guidelines Section 15378(b)(5) and does not require environmental review under CEQA Guidelines Sections 15060(c)(3) and 15061(b)(3) because the proposed action to accept and file the annual report on investments is an organizational or administrative government activity that does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. Any subsequent action or direction stemming from the proposed action may require preparation of an environmental document in accordance with CEQA or the CEQA Guidelines.
Exhibit
1. Annual Report of Investments Fiscal Year 2025-26
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Exhibit 1
Sept. 29, 2026
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2 CITY
TREASURER
ANNUAL
REPORT OF
INVESTMENTS
FISCAL YEAR 2025-26
CHRISTIAN PEACOX
CITY TREASURER
SEPT. 29, 2026
Sept. 29, 2026
Item #1 Page 5 of 41
3 Table of Contents
INTRODUCTION ........................................................................................................................... 4 CITY TREASURER LETTER OF TRANSMITTAL ..................................................................... 5 FISCAL YEAR 2025- 26 QUICK LOOK .................................................................................... 6 MARKET REVIEW ......................................................................................................................... 7 FEDERAL FUNDS TARGET RATE ............................................................................................8 SHORT -TERM INTEREST RATES ......................................................................................... 10 MARKET YIELD CURVE ......................................................................................................... 11 PORTFOLIO REVIEW ................................................................................................................. 12 PORTFOLIO TOTAL ASSETS ................................................................................................. 13 SOURCES OF PORTFOLIO ..................................................................................................... 15 ALLOCATION OF PORTFOLIO .............................................................................................. 16 PORTFOLIO ANALYSIS .............................................................................................................. 19 PORTFOLIO YIELD .................................................................................................................. 20 MATURITY & MODIFIED DURATION ................................................................................. 23 PORTFOLIO INTEREST INCOME ......................................................................................... 25 APPENDICIES .............................................................................................................................. 27 RISK MANAGEMENT DISCLOSURES ................................................................................... 28 DATA TABLES .......................................................................................................................... 31 ADDITIONAL RESOURCES .................................................................................................... 38 Sept. 29, 2026
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4 INTRODUCTION
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5 CITY TREASURER LETTER OF TRANSMITTAL
Fiscal Year 2025-26 Annual Report of Investments
Sept. 29, 2026
Honorable Mayor, City Council, and residents of the City of Carlsbad, I am pleased to present the Annual Report of Investments for the City of Carlsbad for fiscal year 2025-26, which ended June 30, 2026. This report provides a comprehensive overview of the city’s investment portfolio and serves as both a performance review and an archival reference for future decision-making.
The City Treasurer’s Office is responsible for designing and managing an effective investment program for the city and its affiliated agencies. This includes arranging banking services, investing idle funds, managing risk exposures, and reporting all investment activities in accordance with the city’s Investment Policy.
The report is organized into five sections:
• Introduction – includes this Letter of Transmittal and a quick look at key annual data • Market Review – analyzes the economic environment and interest rate trends • Portfolio Overview – details total assets, fund sources and portfolio allocation • Portfolio Analysis – presents performance metrics, including yield, duration and interest income
• Appendices – provides supporting data tables, disclosures and additional resources Investment decisions throughout the year were guided by the city’s core objectives: preserving principal, maintaining liquidity and earning a reasonable rate of return commensurate with prevailing market conditions. Future fund activity will continue to be shaped by market trends and evaluated in alignment with these priorities.
Sincerely,
Christian Peacox
City Treasurer
Sept. 29, 2026
Item #1 Page 8 of 41
6 FISCAL YEAR 2025- 26 QUICK LOOK
4.50 4.00
3.50 Market yield curve
June 30, 2026
Three-
month
Two- year Five- year Ten- year
Maturity
Total portfolio valuation
June 30, 2026
990
980
970
960
950
Par value Market value Book value
Portfolio yield
Fiscal year 2025-26
3.90 3.70
3.50 3.30
Month
Interest rate (%) Portfolio yield (%) Asset value ($ millions) Market review
• Federal funds target rate:
3.75%; fiscal year decrease
of 0.75 percentage points
• Two-year U.S. Treasury:
4.14%; fiscal year increase of
0.42 percentage points
Portfolio overview
• Total portfolio value at par
value: $987,814,607
• Total portfolio fiscal year
increase: $32,743,701
• Investment purchases during
fiscal year: $303,160,000
Portfolio analysis
• Portfolio yield as of June 30,
2026: 3.86%
• Portfolio interest for the
fiscal year: $28,079,398
• Average maturity as of June
30, 2026: 2 years
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7 MARKET REVIEW
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8 FEDERAL FUNDS TARGET RATE
The federal funds target rate is considered one of the most important interest rates in the U.S. economy. It is a key money market rate that correlates with the rates of other short-term credit arrangements. It is the interest rate that banks charge each other for overnight loans and influences many aspects of the U.S. economy.
The rate is represented as a range, which is set by the Federal Open Market Committee eight times per year. The Federal Open Market Committee specifies the short-term objective for the purchase and sale of securities in the open market. The federal funds rate is adjusted to help keep inflation in check and support a healthy job market, influencing borrowing costs and interest rates across the economy.
5.00 4.50
4.00 3.50
3.00 2.50
2.00 1.50
1.00 0.50
0.00 Federal Funds Rate Changes
Fiscal year 2025-26
Month
During fiscal year 2025-26, the Federal Open Market Committee lowered the federal funds target rate by a total of 0.75 percentage points during the first half of the fiscal year as inflation moderated and labor market conditions cooled. The committee subsequently paused further reductions as inflation remained above its 2% objective and renewed price pressures emerged, including higher energy costs. By June 2026, the Federal Reserve maintained the target range at
3.50% to 3.75%, citing solid economic activity, a stable labor market, elevated inflation and continued uncertainty surrounding the economic outlook. Kevin Warsh became Chair of the Federal Reserve in May 2026 and presided over the June meeting, marking a leadership transition near the end of the fiscal year while the Committee maintained its focus on restoring price stability.
Rate (%)
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9 5.00
4.00 3.00
2.00 1.00
0.00 Federal Funds rate
Fiscal year 2025-26 and prior nine years
6.00 Fiscal year
Following years of near-zero interest rates after the Great Recession, the Federal Reserve gradually increased the federal funds target rate between 2015 and 2019 as economic growth strengthened, unemployment declined and inflation moved closer to its long-term target. In response to the COVID-19 pandemic, the Federal Reserve reduced rates to near zero in 2020 to support economic activity and financial markets. As inflation accelerated to its highest level in decades following the pandemic, the Federal Reserve began an aggressive series of rate increases in 2022, raising the federal funds target rate to its highest level in more than twenty years in an effort to restore price stability.
Rate (%)
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10 SHORT -TERM INTEREST RATES
The rates for U.S. Treasury bonds are important to all investors, but especially to bond investors. These bonds are issued by the Department of the Treasury and are an indicator as to how the U.S. government predicts inflation and the overall economy will change. Changes in short-term market interest rates are usually affected by the actions of the Federal Reserve.
5.00 4.80
4.60 4.40
4.20 4.00
3.80 3.60
3.40 3.20
3.00 Short and medium term interest rates of U.S. Treasuries Fiscal year 2025-26
Month
Six-month Two-year Five-year
Interest rates in the three exhibited trends of five-year market, two-year market, and six-month market all had changes under 1 percentage point, measured from June 30, 2025, to June 30, 2026:
• Six-month: decrease of 0.28 percentage points, from 4.29% to 4.01% • Two-year: increase of 0.42 percentage points, from 3.72% to 4.14% • Five-year: increase of 0.40 percentage points, from 3.79% to 4.19% Rate (%)
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11 MARKET YIELD CURVE
The yield curve is a graphic presentation of the difference between short-term and longer-term interest rates of U.S. Treasury instruments on a given day. Financial analysts use it to, among other things, assess likely changes in inflation levels as well as the likelihood that the U.S. economy will enter an economic recession.
6.00 5.50
5.00 4.50
4.00 3.50
3.00 Market yield curve
Fiscal year end 2025-26 and two prior fiscal year ends
Three-month Two-year Five-year Ten-year
Term
June 2024 June 2025 June 2026
Yield curves:
• Normal: implies economic expansion
• Inverted: implies economic reduction
• Flat: implies transition in the economic environment
During fiscal year 2025-26, the Treasury yield curve transitioned from an inverted curve toward a more normal shape as the Federal Reserve reduced short-term interest rates while longer- term Treasury yields moved higher. Although the federal funds target rate declined by 0.75 percentage points during the fiscal year, investors became increasingly concerned about persistent inflation, resilient economic growth, trade policy uncertainty and rising energy prices late in the fiscal year. As a result, longer-term Treasury yields increased while short-term rates declined, producing a modestly upward-sloping yield curve by fiscal year-end. This shift reflected improving confidence that the economy would avoid recession while recognizing that inflation risks remained elevated.
The City Treasurer manages a diversified laddered portfolio of short- and long-term investments that is designed to perform across a variety of interest rate environments.
Maintaining adequate liquidity while extending selected investments along the yield curve allows the city to capture higher long-term yields when appropriate, while preserving the flexibility to respond to changing economic conditions and operating cash flow requirements.
Rate (%)
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12 PORTFOLIO REVIEW
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13 PORTFOLIO TOTAL ASSETS
The City Treasurer manages the investment portfolio in accordance with three primary objectives established by the city’s Investment Policy: (1) preserving the safety of principal, (2) maintaining sufficient liquidity to meet the city's operating requirements and (3) earning a reasonable rate of return consistent with the first two objectives. Safety of principal remains the highest priority in all investment decisions.
During fiscal year 2025-26, the city continued to manage its investments using a diversified laddered portfolio strategy. This approach allowed maturing investments to be reinvested throughout the year as market conditions evolved, while ensuring sufficient liquidity to meet operating cash flow requirements. The laddered structure also reduced the impact of changing interest rates by spreading investment maturities over time rather than concentrating them at a single point.
Portfolio ending balance comparison by valuation method Fiscal year 2025-26 and prior year
1,100
1,000
900
800
700
600
500
Par value Market value Book value
Valuation
Current year Prior year
Total assets in the investment portfolio:
• Par value: $987,814,067, an increase of 3.43% over the prior year • Market value: $977,523,438, an increase of 3.56% over the prior year • Book value: $980,888,137, an increase of 3.63% over the prior year Asset Value ($ millions)
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14 All three valuation methods increased during the fiscal year, reflecting continued growth in the city's investment portfolio as net positive cash flow and investment earnings exceeded expenditures. Although the portfolio increased during the fiscal year, its total balance fluctuates continually as revenues are received and funds are disbursed for city operations and capital projects. Investment earnings and net cash inflows increase total portfolio assets, while expenditures reduce them. By contrast, investment purchases, maturities and calls generally change only the composition of the portfolio between cash and securities and do not, by themselves, affect the total assets reported.
Key portfolio changes at par value during fiscal year 2025-26:
• Maturities: $202,684,983
• Calls: $75,638,000
• Buys: $303,160,000
Whenever practical, investments are selected so that their maturities align with the city's projected operating and capital cash flow requirements. This approach provides greater certainty that funds will be available when needed, reduces the uncertainty associated with future reinvestment decisions, and minimizes the need to sell securities prior to maturity.
Total portfolio value at amortized cost
Fiscal year 2025-26 and prior nine years
1,100
1,000
900
800
700
600
500
Fiscal Year
Over the past 10 fiscal years, the city's investment portfolio has grown by approximately $258 million, or 37%, reflecting the city's overall financial strength. As the portfolio has expanded, the City Treasurer has continued to prudently manage these assets in accordance with the city's Investment Policy by preserving principal, maintaining adequate liquidity, and earning a reasonable rate of return commensurate with prevailing market conditions.
Asset Value ($ millions)
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15 General
19%
Capital projects
43%
Special & Other
4%
Fiduciary &
Internal
11%
Enterprise
23%
SOURCES OF PORTFOLIO
The portfolio is an internal investment pool that invests the available cash from various funds of all city agencies, city owned and fiduciary assets.
Source of funds at amortized cost
June 30, 2026
The capital project fund includes funds for the general capital construction, traffic impact fees, public facilities fees, park development, certain taxes, drainage fees, special districts, infrastructure replacement and gas tax funds. Enterprise funds consist of the Carlsbad Municipal Water District, wastewater, solid waste, storm water and golf course funds.
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16 Cash & pooled
15%
Federal agencies
20%
Municipal bonds
13%
Supra-nationals
3%
Mortgage-backed
10%
U.S. Treasury
13%
Cert. of deposit
1%
Medium-term
25%
ALLOCATION OF PORTFOLIO
Investments are made in financial instruments authorized by the City of Carlsbad Investment Policy and the California Government Code. Apart from bank deposits, deposits in the California state Local Agency Investment Fund and California Asset Management Program, all investments are in fixed-income instruments with known maturity dates.
Allocation of investments at par value
June 30, 2026
The city's investment portfolio remains well diversified among investment classes authorized by the Investment Policy and California Government Code. During fiscal year 2025-26, changes in allocation primarily reflected investment maturities, issuer calls, cash flow requirements and opportunities created by changing market interest rates.
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17 Fiscal year 2025-26 net changes
Percent value change by investment class
100.00
80.00 60.00
40.00 20.00
0.00 -20.00
-40.00
-60.00
Changes in portfolio allocation during fiscal year 2025-26 reflected changing market conditions and the active management of the city's investment portfolio. As Federal Agency securities matured or were called, proceeds were selectively reinvested into U.S. Treasuries where comparable Agency bullet securities offered minimal yield advantage. High-quality corporate notes and municipal bonds were also utilized where appropriate to capture additional yield while providing predictable maturities with limited call risk. These allocation changes supported the city's projected liquidity needs while maintaining broad diversification and remaining within the city's Investment Policy and California Government Code.
Portfolio allocation is presented at par value and therefore does not reflect changes in the market value of individual securities. The city generally follows a buy-and-hold investment strategy, with investments normally held until maturity or until called by the issuer. This approach allows the city to receive the full principal value at maturity while minimizing the potential need to sell securities prior to maturity when market conditions may be unfavorable.
Percentage change (%)
Federal
agencies
Supra-
nationals
U.S.
Treasury
Medium-
term
Cert. of
deposit
Mortgage
-backed
Municipal
bonds
% Change (39.43) 11.32 83.64 54.36 (43.20) (10.92) 21.55
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18 Policy limits and portfolio allocation
June 30, 2026
Municipal bonds
Cert. of deposit
Medium-term notes
Supranational
0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00
Policy limitation Portfolio
Percentage of portfolio (%)
The Investment Policy establishes maximum allocation limits for certain investment types to promote diversification and reduce concentration risk. As of June 30, 2026, every investment category remained within both city policy and California Government Code limitations, providing flexibility for future investment purchases as market opportunities arise.
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19 PORTFOLIO ANALYSIS
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20 PORTFOLIO YIELD
The yield of the portfolio increased 0.48 percentage points during the current fiscal year from
3.38% for fiscal year ending June 2025 to 3.86% for fiscal year ending June 2026.
4.00 3.80
3.60 3.40
3.20 3.00
Portfolio yield
Fiscal year 2025-26
Month
5.00 4.00
3.00 2.00
1.00 0.00
Portfolio yield
Fiscal year 2025-26 and prior nine years
Fiscal year
The portfolio's yield increased 0.48 percentage points during fiscal year 2025-26 as lower- yielding investments matured and were gradually replaced with investments purchased at higher prevailing yields. Because the city follows a buy-and-hold investment strategy and maintains a laddered maturity structure, changes in portfolio yield occur gradually as investments mature or are called and their proceeds are reinvested over time.
Portfolio yield (%) Portfolio yield (%)
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21 Portfolio rate with U.S. Treasury rates
Fiscal year 2025-26 and prior nine years
6.00 5.00
4.00 3.00
2.00 1.00
0.00 U.S. Treasury 6-month U.S. Treasury 2-year
U.S. Treasury 5-year Portfolio
Unlike current market interest rates, which may change rapidly in response to economic conditions and Federal Reserve policy, the city's portfolio yield changes more gradually because it represents the weighted average yield of investments purchased over several years. By maintaining a diversified portfolio with staggered maturities and generally holding investments until maturity, the city reduces the impact of short-term market volatility while providing a more stable and predictable stream of investment earnings.
Interest rate (%)
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22 3.00
2.00 1.00
0.00 -1.00
-2.00
-3.00
-4.00
-5.00
-6.00
-7.00
Historical unrealized gains and losses
Fiscal year 2025-26 and nine prior years
Fiscal year end
Although portfolio yield changes gradually, the market value of individual investments fluctuates continuously as market interest rates change. When interest rates decline, investments purchased at previously higher rates generally increase in market value.
Conversely, when interest rates rise, those same investments generally decrease in market value. These fluctuations are reported as unrealized gains or unrealized losses and are a normal and expected part of fixed-income investing.
Because the city generally holds investments until maturity, fluctuations in market value do not normally result in realized gains or losses. While market value is reported for transparency, the city's investment strategy is designed to preserve principal, maintain adequate liquidity and earn a prudent rate of return over the life of the portfolio.
Percent of Amortized Cost (%)
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23 MATURITY & MODIFIED DURATION
After preserving principal, the city's second investment objective is maintaining adequate liquidity to meet operating and capital funding requirements. Liquidity is achieved by maintaining sufficient cash and structuring investment maturities to align with the city's projected cash flow needs.
Portfolio Liquidity
June 30, 2026
40 30
20 10
0 0-12 13-24 25-36 37-48 49-60
Months to maturity
The city's Investment Policy limits the maximum maturity of any investment to five years. The graph above illustrates the distribution of investment maturities as of June 30, 2026.
Approximately 32.10% of the portfolio, including overnight pooled cash accounts, matures within one year, providing substantial liquidity to meet the city's near-term operating and capital funding requirements.
Average maturity by month
Fiscal year 2025-26
2.20 2.00
1.80 1.60
1.40 The city's Investment Policy also limits the portfolio's weighted average maturity to three years or less. As of June 30, 2026, the portfolio's average maturity was two years. This reflects a deliberate balance between extending maturities where appropriate to capture higher yields available along the yield curve while maintaining sufficient short-term liquidity to meet the city's projected operating and capital cash flow requirements.
Average Maturity (years) Percent of Porfolio (%)
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24 Modified duration
Fiscal year 2025-26
1.80 1.75
1.70 1.65
1.60 1.55
1.50 Month end
While maturity indicates when principal is expected to be returned, modified duration measures the portfolio’s sensitivity to changes in market interest rates. Monitoring modified duration provides an additional measure of interest-rate risk by estimating how changes in market interest rates may affect the portfolio’s market value. Together, maturity and modified duration provide complementary information about the portfolio’s expected cash flows and sensitivity to interest-rate changes.
As of June 30, 2026, the portfolio’s modified duration was 1.69. This means that a one percentage point increase in market interest rates would be expected to decrease the portfolio’s market value by approximately 1.69%, while a one percentage point decrease in rates would be expected to increase its market value by approximately 1.69%, all else being equal.
Modified duration
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25 PORTFOLIO INTEREST INCOME
The city's interest income reflects the cash interest payments received from investments during the fiscal year and should not be confused with the portfolio's overall yield. Because some investments are purchased above or below their face value, the cash interest payments received do not always reflect the investment's yield over its term.
Portfolio interest income
Fiscal year 2025-26
3.50 3.00
2.50 2.00
1.50 1.00
0.50 -
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Interest income for the fiscal year totaled $28,079,398, an increase of $3,069,099 (12.27%) from the prior fiscal year.
Portfolio interest income
Fiscal year 2025-26 and prior nine years
30.0 25.0
20.0 15.0
10.0 5.0
-
Interest income is influenced by prevailing market interest rates, the portfolio's investment mix, the timing of investment purchases and maturities, and the interest rates available when investment proceeds are reinvested. As a result, interest income will naturally fluctuate from year to year as market conditions and portfolio cash flows change.
Interest Income (millions) Interest Income ($ millions) Sept. 29, 2026
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26 Interest income by investment classification
Fiscal year 2025-26
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
The distribution of interest income among investment classifications generally reflects the composition of the city's investment portfolio. Because Federal Agencies and Medium-Term Notes represent 45% of the portfolio, they generated the largest share of interest income during the fiscal year. Cash and pooled investments were the third largest source of interest income, reflecting the substantial liquidity required in near-term investments under one year.
The city's diversified investment strategy continues to provide a stable source of interest income while maintaining compliance with the primary investment objectives of safety, liquidity and return on investment.
Interest income (thousands)
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27 APPENDICES
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28 RISK MANAGEMENT DISCLOSURES
All investments are exposed to risk of some type. The objective of risk management is to identify the risks involved and establish acceptable levels of risks that are consistent with the city’s investment objectives. Risk management includes managing, measuring, monitoring and reporting the various risks to which portfolio investments are exposed.
Portfolio investments are exposed to the following types of risks:
• Credit risk
- Custodial credit risk
• Investments
• Deposits
- Default credit risk
- Concentration credit risk
• Interest rate risk
• Event risk
Custodial credit risk (investments)
The city uses third-party custody and safekeeping service for its investment securities. Principal Custody Solutions is under contract to provide these custodial services. Custodial credit risk is the risk that the city will not be able to recover the value of its investments in the event of a Principal Custody Solutions failure. All city investments held in custody and safekeeping by Principal Custody Solutions are held in the name of the city and are segregated from securities owned by the firm. This is the lowest level of custodial credit risk exposure.
Custodial credit risk (deposits)
The city maintains cash accounts at Wells Fargo Bank. At the conclusion of each business day, balances in these accounts are “swept” into overnight investments. These overnight investments are pooled and collateralized with either U.S. government securities or U.S. agency securities. The California Government Code authorizes this type of investment. A small amount of cash is not swept from the Wells Fargo Bank checking accounts to cover checks that may be presented for payment. Amounts up to $250,000 are FDIC insured.
Default credit risk
Default credit risk is the risk that the issuer of the security does not pay either the interest or the principal when due. The debts of most U.S. agencies are not backed by the full faith and credit of the federal government; however, because the agencies are U.S. Government- sponsored, they carry an AA credit rating. The default credit risk of these investments is minimal.
Unless otherwise exempted, the California Government Code limits investments, at the time of purchase, to the top three credit ratings: AAA, AA, and A. As of June 30, 2026, all investments have maintained credit ratings at or above the minimum requirement.
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29 All investments are made when the credit ratings are either AAA, AA or A, however, an investment may fall below the minimum requirement subsequent to purchase. The California Government Code and the city’s Investment Policy allow the City Treasurer to determine the course of action to correct exceptions to the policy.
The Local Agency Investment Fund is an investment pool managed by the California State Treasurer. Its investments are short-term and follow the investment requirements of the state.
The state treasurer is not required to contract for a credit rating to be assessed for the fund.
California Government Code Section 16429.3 excludes Local Agency Investment Fund deposits from being transferred, loaned, impounded, or seized by any state agency or official.
Concentration credit risk
Concentration credit risk is the heightened risk of potential loss when investments are concentrated in one issuer. The California Government Code does not identify a specific percentage that indicates when concentration risk is present for any one issuer.
California Government Code Section 53601(k) requires that total investments in medium-term notes of all issuers not exceed 30% of the portfolio. As of June 30, 2026, 25.08% of the city’s total portfolio investments were in medium-term notes.
California Government Code Section 53601(o) requires that non-agency mortgage-backed securities shall not exceed 20% of the portfolio. As of June 30, 2026, all city-held mortgage- backed securities are backed by Federal Agencies.
For concentration of investments in any one issuer, the city’s Investment Policy requires that no more than 5% of investments in medium-term notes, non-agency mortgage-backed securities, and municipal bonds be in any one issuer. There is no similar requirement in either the California Government Code or the city’s investment policy for U.S. agencies. As of June 30, 2026, no investments in any one of the aforementioned securities has an issuer that exceeded 5% of total portfolio investments.
Interest rate risk
The interest rate risk is the risk that investments will lose market value because of increases in market interest rates. A rise in market interest rates will cause the market value of investments made earlier at lower interest rates to lose value. The reverse will cause a gain in market value.
As of June 30, 2026, the portfolio had a 0.34% unrealized loss in market value based on amortized cost.
• The city’s Investment Policy has adopted two means of limiting its exposure to market value losses caused by rising market interest rates: (1) monitoring modified duration of total portfolio investments, and (2) ensuring investments maturing within the next six months, measured at par value, plus estimated base operating revenues, shall be sufficient to meet the city’s next six months of expenditure requirements.
Sept. 29, 2026
Item #1 Page 32 of 41
30 The city’s exposure to interest rate risk is within acceptable limits.
Event risk
Event risks include the chance that something unexpected will impede the ability of an issuer of a security to meet its obligations. These types of risks are usually short in duration but can impair the city’s ability to communicate with or use banking services. Such an event could cause a delay in collecting securities which have matured. Security risks are also within this category.
Sept. 29, 2026
Item #1 Page 33 of 41
31 DATA TABLES
Data tables provided for additional details for graphs throughout the report.
Federal target rate detail, fiscal year 2025-26
Period Range limit
Jul 2025 4.25 - 4.50%
Sep 2025 4.00 - 4.25%
Oct 2025 3.75 - 4.00%
Dec 2025 3.50 – 3.75%
Jan 2026 3.50 - 3.75%
Mar 2026 3.50 - 3.75%
Apr 2026 3.50 - 3.75%
Jun 2026 3.50 - 3.75%
Short-term interest U.S. Treasury rate detail, fiscal year 2025-26
Period Six-month Two-year Five-year
Jul 2025 4.31% 3.94% 3.96%
Aug 2025 4.01% 3.59% 3.68%
Sep 2025 3.83% 3.60% 3.74%
Oct 2025 3.79% 3.60% 3.71%
Nov 2025 3.74% 3.47% 3.59%
Dec 2025 3.59% 3.47% 3.73%
Jan 2026 3.61% 3.52% 3.79%
Feb 2026 3.60% 3.38% 3.51%
Mar 2026 3.72% 3.79% 3.92%
Apr 2026 3.71% 3.88% 4.02%
May 2026 3.78% 3.98% 4.13%
Jun 2026 4.01% 4.14% 4.19%
Market yield curve, fiscal year 2025-26 and prior two years
FY end date Three-month Two-year Five-year Ten-year 06/30/24 5.48% 4.71% 4.33% 4.36%
06/30/25 4.41% 3.72% 3.79% 4.24%
06/30/26 3.87% 4.14% 4.19% 4.44%
Sept. 29, 2026
Item #1 Page 34 of 41
32 Valuation table, fiscal year 2025-26
Different values are presented throughout the report. This data table presents varying valuation types, listed by class as of June 30, 2026.
Class Par value Market value Book value
Certificate of deposit $ 10,086,000 $ 10,102,879 $ 10,085,354 Medium-term notes $ 247,750,000 $ 243,266,921 $ 245,098,212 Federal agency $ 199,085,000 $ 197,127,071 $ 198,227,427 U.S. Treasury $ 132,680,000 $ 131,683,432 $ 132,226,089 Supranational $ 30,000,000 $ 29,688,940 $ 29,814,962
Municipal bonds $ 128,885,000 $ 127,359,058 $ 127,760,108 Mortgage-backed (Agency) $ 93,664,696 $ 92,631,227 $ 92,012,074 Cash & pooled $ 145,663,911 $ 145,663,911 $ 145,663,911 Total $ 987,814,607 $ 977,523,438 $ 980,888,137
Portfolio assets valuation, fiscal year 2025-26 and prior nine years
Fiscal year Par value Market value Book value
2016-17 $ 720,912,625 $ 720,280,916 $ 722,577,923
2017-18 $ 761,973,309 $ 750,805,057 $ 761,499,745
2018-19 $ 794,156,136 $ 796,915,076 $ 793,677,467
2019-20 $ 807,311,873 $ 827,577,140 $ 812,848,717
2020-21 $ 813,600,409 $ 827,094,051 $ 821,268,939
2021-22 $ 846,773,333 $ 821,428,843 $ 852,168,180
2022-23 $ 874,350,106 $ 830,832,607 $ 874,704,150
2023-24 $ 902,855,260 $ 871,929,110 $ 897,056,042
2024-25 $ 955,070,906 $ 943,918,786 $ 946,565,715
2025-26 $ 987,814,607 $ 977,523,438 $ 980,888,137
Sources of portfolio at amortized cost, fiscal year 2025-26
Fund type 2024-25 2025-26
General $ 188,998,257 $ 184,748,976
Capital projects $ 410,509,844 $ 426,860,742
Enterprise $ 212,483,694 $ 229,439,446
Fiduciary & Internal service $ 98,728,981 $ 105,295,665 Special & other $ 35,844,939 $ 34,543,307
Total $ 946,565,715 $ 980,888,137
Sept. 29, 2026
Item #1 Page 35 of 41
33 Portfolio allocation at book value, June 30, 2026
Policy limitations are not limited for federal agency issuers.
Class % Total Policy limits
Supranational 3.04% 10%
Municipal bonds 13.05% 20%
Medium-term notes 25.08% 30%
Certificate of deposit 1.02% 30%
U.S. Treasury 13.43% N/A
Mortgage-backed (Agency) 9.48% N/A
Federal Investments 20.15% N/A
Cash & Pooled Cash 14.75% N/A
Totals 100.00%
Investment changes by class, fiscal year 2025-26
This table presents the details of investment changes, excluding cash and pooled cash, listed by class.
Class 6/30/2025 6/30/2026 Dollar Change Change
Certificate of deposit $ 17,756,000 $ 10,086,000 $ (7,670,000) -43.20% Medium-term notes $ 160,500,000 $ 247,750,000 $ 87,250,000 54.36% Federal agency $ 328,674,000 $ 199,085,000 $ (129,589,000) -39.43% U.S. Treasury $ 72,250,000 $ 132,680,000 $ 60,430,000 83.64% Supranational $ 26,950,000 $ 30,000,000 $ 3,050,000 11.32% Municipal bonds $ 106,035,000 $ 128,885,000 $ 22,850,000 21.55% Mortgage-backed (Agency) $ 105,148,679 $ 93,664,696 $ (11,483,983) -10.92% Total $ 817,313,679 $ 842,150,696 $ 24,837,017 3.04%
Class Maturities Calls Buys
Certificate of deposit $ 7,422,000 $ 248,000 $ -
Medium-term notes $ 20,000,000 $ 7,750,000 $ 115,000,000 Federal agency $ 120,109,000 $ 64,480,000 $ 55,000,000
U.S. Treasury $ 12,000,000 $ - $ 72,430,000
Supranational $ 9,000,000 $ 2,950,000 $ 15,000,000
Municipal bonds $ 17,670,000 $ 210,000 $ 40,730,000
Mortgage-backed (Agency) $ 16,483,983 $ - $ 5,000,000 Total $ 202,684,983 $ 75,638,000 $ 303,160,000
Sept. 29, 2026
Item #1 Page 36 of 41
34 Portfolio yields, fiscal year 2025-26 and prior nine years
Treasury, 06/30
Month
ending
Portfolio
yield
Fiscal
year
Portfolio
yield
Six-
month
Two-
year
Five-
year
07/31/25 3.40% 2016-17 1.25% 1.14% 1.38% 1.89%
08/31/25 3.44% 2017-18 1.57% 2.11% 2.52% 2.73%
09/30/25 3.46% 2018-19 1.96% 2.09% 1.75% 1.76%
10/31/25 3.49% 2019-20 1.69% 0.18% 0.16% 0.29%
11/30/25 3.52% 2020-21 1.17% 0.06% 0.25% 0.87%
12/31/25 3.58% 2021-22 1.28% 2.51% 2.92% 3.01%
01/31/26 3.63% 2022-23 2.22% 5.47% 4.87% 4.13%
02/28/26 3.65% 2023-24 2.88% 5.33% 4.71% 4.33%
03/31/26 3.71% 2024-25 3.38% 4.29% 3.72% 3.79%
04/30/26 3.76% 2025-26 3.86% 4.01% 4.14% 4.19%
05/31/26 3.79%
06/30/26 3.86%
Unrealized gain or loss, fiscal year 2025-26
Unrealized gain or loss is calculated by subtracting the market value from the book value. All calculations are performed at the end of each month.
Month
Unrealized
gain or loss
Jul 2025 -0.46%
Aug 2025 0.05%
Sep 2025 0.12%
Oct 2025 0.18%
Nov 2025 0.37%
Dec 2025 0.36%
Jan 2026 0.36%
Feb 2026 0.62%
Mar 2026 -0.02%
Apr 2026 -0.07%
May 2026 -0.19%
Jun 2026 -0.34%
Sept. 29, 2026
Item #1 Page 37 of 41
35 Modified duration, fiscal year 2025-26
Month Modified duration
07/31/25 1.72
08/31/25 1.73
09/30/25 1.69
10/31/25 1.72
11/30/25 1.71
12/31/25 1.69
01/31/26 1.68
02/28/26 1.71
03/31/26 1.74
04/30/26 1.68
05/31/26 1.68
06/30/26 1.69
Revenue from investments monthly, fiscal year 2025-26
Month Income
Jul 2025 $ 2,774,154
Aug 2025 $ 2,330,505
Sep 2025 $ 2,483,538
Oct 2025 $ 2,318,415
Nov 2025 $ 1,398,814
Dec 2025 $ 2,327,391
Jan 2026 $ 3,080,845
Feb 2026 $ 2,362,492
Mar 2026 $ 2,661,640
Apr 2026 $ 3,264,061
May 2026 $ 1,172,831
Jun 2026 $ 1,904,712
Total $ 28,079,398
Sept. 29, 2026
Item #1 Page 38 of 41
36 Revenue from investments by class and totals, fiscal year 2025-26 and prior nine years
Investment class Cash income Fiscal year Cash income Federal Agency $ 7,443,768 2016-17 $ 9,286,187
Supranational $ 961,500 2017-18 $ 11,248,807
Treasury $ 2,517,792 2018-19 $ 14,837,963
Medium-term Notes $ 5,521,229 2019-20 $ 17,031,603
Certificate of Deposit $ 413,112 2020-21 $ 14,026,325
Mortgage-backed (Agency) $ 4,009,948 2021-22 $ 12,047,464 Municipal $ 2,887,717 2022-23 $ 16,168,150
Cash & Pooled Cash $ 4,324,333 2023-24 $ 21,201,394
Fiscal Year 2024-25 Total $ 28,079,398 2024-25 $ 25,010,299 2025-26 $ 28,079,398
Liquidity by maturity period as of June 30, 2026
Period, in months Maturity value Percentage
0-12 $ 317,108,070 32.10%
13-24 $ 175,087,851 17.72%
25-36 $ 188,008,686 19.03%
37-48 $ 167,610,000 16.97%
49-60 $ 140,000,000 14.17%
Total $ 987,814,607 100.00%
Average maturity, fiscal year 2025-26
Month Average maturity (years)
Jul 2025 1.72
Aug 2025 1.73
Sep 2025 1.69
Oct 2025 1.72
Nov 2025 1.71
Dec 2025 1.69
Jan 2026 1.68
Feb 2026 1.71
Mar 2026 1.74
Apr 2026 1.95
May 2026 1.96
Jun 2026 2.00
Sept. 29, 2026
Item #1 Page 39 of 41
37 Cash inflows and outflows, fiscal year 2025-26
The city’s portfolio balance increased 3.63% from $947 million to $981 million in book value over the fiscal year. The increase of $34 million does little to show the volume of cash that flows in and out of the portfolio during one fiscal year. The following table illustrates that the City Treasurer managed over $2.04 billion of cash inflows and cash outflows which prompted investment decisions during the fiscal year.
Cash inflows and outflows
Investment Calls $ 75,638,000
Investment Maturities $ 202,684,983
Investment Purchases $ 303,160,000
Interest Income $ 28,079,398
LAIF Investments $ 189,000,000
LAIF Withdrawals $ 80,000,000
CAMP Investments $ 79,000,000
CAMP Withdrawals $ 179,000,000
Overnight Investments $ 448,035,640
Overnight Withdrawals $ 451,959,543
Sept. 29, 2026
Item #1 Page 40 of 41
38 ADDITIONAL RESOURCES
The Annual Report of Investments is a stand-alone report; however, additional documents are available for interested parties:
Investment Policy
The Investment Policy is approved at least annually by City Council and governs investment management. Included are topics such as:
• Investing objectives
• Authorized investments
• Limitations
• Review and reporting
The Investment Policy can be found on the City of Carlsbad City Treasurer website at:
https://www.carlsbadca.gov/city-hall/city-treasurer
Monthly investment reports
Monthly investment reports are presented to City Council and provide an in-depth status on the full portfolio on a routine basis. These reports include aspects such as:
• Current period maturities, calls, and purchases
• Detail listing of investments
• Investment ratings and outlooks
• Portfolio allocation by issuer
The monthly investment reports can be found on the City of Carlsbad City Treasurer website at:
https://www.carlsbadca.gov/city-hall/city-treasurer
Contacts
We are available for questions or comments on any City Treasurer report or function:
• Christian Peacox, City Treasurer
[email protected]
• Katie Schroeder, Senior Accountant, Office of the City Treasurer [email protected]
Sept. 29, 2026
Item #1 Page 41 of 41