City of Napa
Quarterly Investment Report
as of December 31, 2022
Introduction
This report represents the City’s investment portfolio as of December 31, 2022. The report includes all invested City funds with the exception of bond proceeds. All investments are in compliance with the City’s adopted Statement of Investment Policy.
Inve
stment Approach
The City’s investments are guided by an Investment Policy , which is reviewed and approved by the Council annually. The Investment Policy was last approved by the City Council in June 2022 and is provided as an appendix to this report for reference. The policy directs that investment goals—in order by priority—are safety, liquidity, and yield. This conservative approach ensures assets are available for use while also allowing the City to earn additional resources on idle funds. The City relies on an investment advisor and the state investment pool known as the Local Agency Investment Fund (LAIF).
Current M
arket Conditions
The Fed remained center stage and focused on increasing overnight interest rates and tightening monetary conditions in its ongoing battle with multi-decade-high inflation. At its December meeting, the Federal Open Market Committee (FOMC) raised the fed funds rate by 50 basis points (bps) (0.50%) to a new target range of 4.25% to 4.50%, the highest level since 2007.
In large part due to the Fed’s historic pace of rate increases, there were accumulating signs of an economic slowdown, including: (1) a steeply inverted yield curve; (2) a sharp reversal in the housing market; (3) weakening in both the manufacturing and services sectors; (4) declining personal savings; (5) tepid consumer confidence; (6) retreating commodity prices; and (7) a falling U.S. dollar.
On the
positive side, employment remains strong, household income is rising, and inflation has begun to moderate. The latter forces are significant and may keep the economy out of a deep recession, but uncertainty remains high.
The
U.S. labor market was strong and historically tight for most of 2022, driving both job gains and nominal wage growth. Over the fourth quarter, the U.S. economy added 742,000 jobs in aggregate, which was strong, but a downshift from the torrid pace of the past seven quarters. The unemployment rate fell back to 3.5% in December, matching a 50+ year low. Wage growth moderated but remained above trend, while the labor force participation rate improved.
Retail
sales dipped in both November and December in a warning sign that consumer spending, which accounts for more than two-thirds of U.S. economic activity, may be moderating. Some of the moderation in spending reflected an ongoing shift in demand from goods to services post-pandemic.
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of December 31, 2022
After three-quarters of surging yields, U.S. Treasuries traded within a range during the quarter. Short- term maturities (less than one year) continued to increase in lockstep with adjustments to Fed policy, reflecting the two rate hikes totaling 1.25% in the fourth quarter. Yields on longer -term issues were mixed, with yields on 3-7 year Treasuries lower, while those 10-years and longer rose modestly. As a result, fixed income indices posted positive total returns during the quarter , following three prior negative quarters. The ICE Bank of America Merrill Lynch 2-, 5-, and 10-year U.S. Treasury indices returned 0.45%, 1.14%, and 0.65%, respectively, for the quarter.
Source: Bloomberg.
Portfolio Strategy and Performance
During the quarter, the City’s portfolio continued to maintain a defensive duration position, relative to its benchmark, as the Federal Reserve continued to raise its short -term policy rate in its relentless battle with inflation. Yield spreads, or the difference in yield between U.S. Treasuries and other sectors, began the quarter at wide levels, providing good opportunities to purchase credit securities early in the quarter, including an asset -backed security and a negotiable CD. Spreads then narrowed during the quarter, resulting in good performance from cr edit instruments. While adding to the portfolio’s credit sectors, the allocation to U.S. Treasuries was also increased to bolster portfolio liquidity.
The portfolio returned positive performance for the quarter and outperformed the benchmark, primarily due to the portfolio’s sector diversification. Over the long term, the portfolio continues to return strong performance relative to the benchmark.
Maturity 12/31/22 9/30/22 Q over Q
Change
3-Mo. 4.34% 3.25% +1.09%
6-Mo. 4.75% 3.90% +0.85%
1-Yr. 4.69% 3.93% +0.76%
2-Yr. 4.43% 4.28% +0.15%
3-Yr. 4.22% 4.29% -0.07%
5-Yr. 4.00% 4.09% -0.09%
10-Yr. 3.87% 3.83% +0.04%
Yield Curve History
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
3M 1Y 2Y 3Y 5Y 10Y
Maturity
U.S. Treasury Yield Curve
December 31, 2022 December 31, 2021
September 30, 2022
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City of Napa
Quarterly Investment Report
as of December 31, 2022
Total Return Comparison
Periods Ending December 31, 2022
Past
Quarter
Past
Year
Past
3 Years
Past
5 Years
City of Napa 0.97% -4.98% -0.46% 0.99%
BofA Merrill Lynch 1-5 Year
Government Index 0.94% -5.25% -0.78% 0.66%
LAIF Yield 0.52% 1.13% 0.89% 1.42%
Returns for periods under one year are periodic; all other returns are annualized.
Source of LAIF yield is State Treasurer’s website. Reflects quarterly apportionment rate of LAIF de-annualized and linked over the specified time periods.
Portfolio Information
The City’s cash, excluding bond proceeds, is pooled for investment purposes. As of December 31, 2022, invested funds totaled $245,868,270 on a market value basis . These investments belong to the General Fund and restricted funds such as the Developer, Special District, Water, Solid Waste, and Recycling Funds.
The City’s portfolio is well diversified by investment type and consists of U.S. Treasuries, federal agencies, federal agency commercial mortgage-backed securities (CMBS), municipals, supranationals, corporate notes, negotiable certificates of deposit, asset-backed securities, and cash instruments such as CAMP and LAIF. As noted in the following chart and on the attached investment detail report, as of December 31, 2022, approximately 74% of the City’s investment portfolio was invested in the State Local Agency Investment Fund (LAIF) , the California Asset Management Program (CAMP) , and high-quality U.S. Treasury and federal agency securities to maintain the focus on safety and liquidity.
Approximately 21% of the portfolio is allocated to high quality credit instruments including negotiable certificates of deposit, corporate notes, and asset-backed securities, and 4% is in municipal obligations and supranationals combined.
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of December 31, 2022
The City’s Investment Policy allows for a 5 -year time horizon with an emphasis on liquidity. As of December 31 , 202 2, 24% of the City’s funds were invested in very short -term or overnight investments, 26% of the funds were invested with maturities between 91 days and 2 years, and 50% of the investment portfolio had a maturity ranging from 2 to 5 years. This distribution allows the City the necessary liquidity to meet operational and emergency cash needs wh ile maximizing returns on funds not needed in the immediate future.
Federal Agencies
2%
Federal Agency
CMBS
1%
Municipals
4%
U.S. Treasuries
48%
LAIF and CAMP
23%
Certificates of
Deposit
1%
Corporate Notes
15%
Asset-Backed
Securities
5%
Supranationals
1%
Investments by Type
December 31, 2022
24%
0%
5%
21%
50%
0%
10%
20%
30%
40%
50%
60%
0 - 90 days 91 - 180 days 181 - 360 days 361 - 720 days 721 - 1825 days Maturities in Days
December 31, 2022
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of December 31, 2022
Conclusion
All City funds are invested in accordance with the approved Investment Policy with an emphasis on safety, liquidity, and yield (in that order). The City’s investment strategy of balancing the investment portfolio between short-term investments (to meet cas h flow needs) and longer -term maturities (to realize a higher rate of return) is appropriate given the current market conditions.
ATTACHMENT 1