Short Term Investment Strategy Discussion
April 21, 2022
Mark Creger, Director
John F. Grady, Managing Director
Increase in Liquidity Balances Provide Investment Opportunities Source: Clearwater Analytics, Public Trust Advisors
The City’s LAIF balance of $65mm as of March 2022 is near an all time high as a result of ARPA funds and stronger than expected revenues during the COVID pandemic.
The City’s diversified investment program allows for a dynamic approach to investment strategies in various interest rates environments.
Given current LAIF balances, the City’s expected cash flow needs and current market conditions, the City may benefit from further diversification of the investment program by investing a portion of LAIF balances within an Enhanced Cash strategy portfolio with monthly maturities that provide higher yield opportunities than the current LAIF rate of 0.32% or the current bank earnings credit rate 0.45%.
Federal Funds Rate Expectations Increase Significantly
Source: Bloomberg
In September 2021 the market had one 0.25% overnight rate increase priced into all of 2022 with an implied rate of 0.27%.
As of April 2022, more than nine 0.25% rate hikes priced into the market with an implied rate of 2.47%.
Inflation takes hold….Slope of yield curve increases
Source: Bloomberg
The yield curve has steepened and short term rates have increased based on inflation expectations and future FOMC rate increase expectations.
U.S. Treasury Yield Curve and LAIF – January 2021
In January LAIF rate provided higher yield than U.S. Treasuries beyond 5 years.
This scenario did not provide an opportunity for an Enhanced Cash strategy portfolio.
LAIF Dec 2020 0.63%
Source: Bloomberg,
https://www.treasurer.ca.gov/pmia-laif/historical/quarterly.asp
U.S. Treasury Yield Curve and LAIF – March 2022
Source: Bloomberg,
https://www.treasurer.ca.gov/pmia-laif/historical/quarterly.asp Inflation and FOMC rate increase expectations have pushed yields higher in 2022. The LAIF rate is lagging and will likely increase over time if yield remain near current levels.
Current yields offer an advantage over LAIF as rates have increased.
LAIF Mar 2022 0.32%
Recommendation: Allocate $10mm - $15mm to EC Portfolio Based on the City’s estimated cash flow needs through Fiscal Years 21/22 and 22/23, and considering current short term Treasury Bill rates for maturities between three and nine months, we recommend allocating $10mm - $15mm to an Enhanced Cash strategy portfolio with maturities between three months and nine months.
The Enhanced Cash strategy portfolio would consist of U.S. Treasury Bills or other short term permitted investments (commercial paper) with monthly maturities to provide cash flows throughout the Fiscal Year. We will communicate each upcoming maturity, likely monthly, and provide reinvestment recommendations based on cash needs and the current LAIF rate for comparison.
Source: Clearwater Analytics, Public Trust Advisors
Further Investment Program Diversification
The use of the Enhanced Cash strategy will further diversify the City’s overall investment program while maintaining balances in LAIF for short term operating expenses.
These recommendations are based upon our understanding of the City’s cash flows, risk tolerances, and investment objectives.
Source: Clearwater Analytics, Public Trust Advisors
DISCLOSURES
This presentation is for informational purposes only. The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness are not guaranteed. The materials in the attached are opinions of Public Trust Advisors, LLC and should not be construed as investment advice. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political, or financial developments. Performance comparisons will be affected by changes in interest rates. Investing involves risk including the possible loss of principal. The presentation is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. All calculations and results presented and are for discussion purposes only and should not be used for making and calculations and/or decisions. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.
The investment advisor providing these services is Public Trust Advisors, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940, as amended. Registration with the SEC does not imply a certain level of skill or training. Public Trust is required to maintain a written disclosure brochure of our background and business experience. If you would like to receive a copy of our current disclosure brochure, privacy policy, or code of ethics please contact us.
There is no guarantee that investment strategies will achieve the desired results under all market conditions, and each investor should evaluate its ability to invest long-term, especially during periods of a market downturn. This information may contain statements, estimates, or projections that constitute “forward-looking statements” as defined under U.S. federal and other jurisdictions’ securities laws. Any such forward looking statements are inherently speculative and are based on currently available information, operating plans, and projections about future events and trends. As such, they are subject to numerous risks and uncertainties.
Public Trust Advisors
717 17th Street, Suite 1850
Denver, Colorado 80202