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City of Hayward
Investment Program Update
415-265-3760
For Institutional Investor or Investment Professional
Use Only – This material is not for inspection by,
distribution to, or quotation to the general public
Monique Spyke, Managing Director
ATTACHMENT II
▸ U.S. economy has been characterized by:
▹ High inflation. Peaked at 9.1% in June 2022 and, while now at 3.7%, is still above the Fed’s 2% target.
▹ Stronger than expected GDP. A recession in 2023 appeared likely at the start of the calendar year, but growth for the first three quarters has been relatively strong.
▹ Resilient labor market. Unemployment rate below 4% since February 2022. ▹ Headwinds exist. Higher energy prices, elevated geopolitical risks, high inflation, and reduced consumer savings, could lead to a recession in the next year. ▸ Fed has hiked rates over 500 basis points (5.00%) since March 2022 . ▹ For 10 consecutive meetings the Fed raised the target rate, bringing it from
0.00% to 0.25% to its current range of 5.25% to 5.50%.
▹ Potential for one additional rate hike in 2023.
▹ Market currently has a “higher-for-longer” mindset.
▸ Interest rates are at their highest levels since 2006-07. ▹ Yield curve is inverted.
▹ Higher yields present great opportunities for City’s future earnings. ▹ Increase in rates has negatively impacted market values.
Market Themes
1 Treasury Yields Higher; Curve Inverted
2Source: Bloomberg as of September 30, 2023.
0%
1%
2%
3%
4%
5%
6%
2-Year Treasury Yield
September 30, 2006 - September 30, 2023
17-Year Average:
1.47%
5.04%
0%
1%
2%
3%
4%
5%
6%
3 M
1 Y
2 Y
3 Y
4 Y
5 Y
10 Y
30 Y
Maturity
U.S. Treasury Yield Curve
September 30, 2023 March 31, 2023
City of Hayward’s Investment Objectives
City’s investment policy. 3
Safety
• High quality
investments
• Diversification by
sector, issuer,
and maturity
• Management of
credit and market
risk
Liquidity
• Cash flow
coordination with
the City
• Allocation to
overnight funds
Yield/Return on
Investment
• Duration
management
• Active trading
and continual
evaluation of
relative value
among allowable
sectors
City of Hayward Portfolio Characteristics
As of September 30, 2023. Market values include accrued interest and exclude cash in the money market fund. Excludes overnight funds. 4 Market
Value1 Yield Average
Maturity
Total Portfolio $253,948,429 3.09% 2.11 years
Long-Term Portfolio $180,917,974 2.44% 2.69 years
Short-Term Portfolio $73,030,455 4.69% 0.66 years
10%
18%
23%
19%
15% 15%
$0
$10
$20
$30
$40
$50
$60
$70
0-6
Months
6-12
Months
1-2
Years
2-3
Years
3-4
Years
4-5
Years
Millions
Maturity Distribution
Short-Term Portfolio Long-Term Portfolio
▸ Portfolio segmentation allows for optimal investment.
City of Hayward Portfolio Characteristics
5 Ratings by Standard & Poor’s as of September 30, 2023. Securities in the City's portfolio are in compliance with California Government Code and the City's investment policy. Portfolio information excludes overnight funds. Accrued interest is excluded.
Securities not rated (NR) or rated BBB+ by S&P are rated A-, or the equivalent, or better by Moody’s and/or Fitch. ▸ Portfolio is diversified by sector and issuer and in compliance with the City’s investment policy ▸ Portfolio is of high credit quality; average rating of AA1 U.S. Treasury
73%
Agency MBS
6%
Supranational
1%
Municipal
3%
Negotiable CD
<1%
Asset-Backed
Security
2%
Corporate
Note
15%
Sector Allocation
NR
2%
BBB+
1%
AAA
2%
AA
84%
A
11%
Credit Quality (S&P Ratings)
With Rising Rates, Portfolio Earnings Increasing
6As of September 30, 2023. Long-Term Portfolio interest earnings. $0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Quarterly Interest Earnings
Long-Term Portfolio Performance Remains
Positive
Interest earned calculated as the ending accrued interest less beginning accrued interest, plus net interest activity.
Returns are presented on an annualized basis.
The portfolio’s benchmark is currently the ICE BofA 1-5 Year U.S. Treasury Index. Prior to 12/31/21 it was the ICE BofA 1-3 Year U.S. Treasury Index.
Source: Bloomberg.
▸ While sharply rising interest rates have had a negative impact on the portfolio’s market values, the portfolio continues to perform well versus its benchmark, the 1-5 Year U.S. Treasury index. ▸ Portfolio outperformance can be attributed to the portfolio’s diversification and duration management.
7 Market Value Basis Earnings Past 1 Year Past 5 Years Past 10 Years Interest Earned $2,842,719 $11,261,461 $18,006,505
Change in Market Value $1,706,908 ($7,901,536) ($10,769,855) Total Dollar Return $4,549,627 $3,359,925 $7,236,650
Total Return
City of Hayward 2.59% 0.87% 0.80%
Benchmark 2.12% 0.61% 0.59%
Difference +0.47% +0.26% +0.21%
As of September 30, 2023
Outlook
8 ECONOMY AND INTEREST RATES
▸ Strong labor market and wage growth
▸ Inflation stuck at 3% - 3.5% significantly over the Fed’s 2% target
▸ U.S. consumer favors services yet spending less as we approach the holidays
▸ Federal Reserve continues to fight inflation, may see one more rate hike in 2023
▸ Increased risk of recession due to decreased consumer spending, higher energy prices, and manufacturing
slump
PORTFOLIO STRATEGY
▸ Continued focus on safety and liquidity
▸ Maintain broad diversification by sector, industry, and issuer
▸ Evaluate all opportunities to safely add value to the portfolios
Disclaimer
Investment advisory services are provided by PFM Asset Management LLC (“PFMAM”), an investment adviser registered with the U.S. Securities and Exchange Commission and a subsidiary of U.S. Bancorp Asset Management, Inc. (“USBAM”). USBAM is a subsidiary of U.S. Bank National Association (“U.S.
Bank”). U.S. Bank is a separate entity and subsidiary of U.S. Bancorp. U.S. Bank is not responsible for and does not guarantee the products, services or performance of PFMAM.The information contained is not an offer to purchase or sell any securities. Additional applicable regulatory information is available upon request.
For more information regarding PFMAM’s services please visitwww.pfmam.com.
Disclaimer
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