City of Napa
Quarterly Investment Report
as of
March
3 1
, 202
3 Introduction
This report represents the City’s investment portfolio as of
March
3 1
, 202
3 . 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.
Investment 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 appr
oved by the City Council
in
June
202
2 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 u
se while also allowing the City to earn additional resources on idle funds. The City relies on an investment advisor and the
s
tate investment pool known as the Local Agency Investment Fund (LAIF).
Current Market Conditions
In
the first quarter
,
economic conditions were characterized by
:
(1)
lingering inflation that remains
well above the Fed
eral Reserve
’s
(the Fed)
long
-
term inflation target
; (2)
a labor market that
is strong
but
may be showing signs of moderation
;
and
(3)
greater economic uncer
tainty following
the surprise
failure
of two large U.S. banks and subsequent
financial industry volatility
.
The scope for the
Fed
to continue its rate
-
hiking path has narrowed dramatically with the recent
developments in the banking sector and the outlook
for economic growth. Following two rate hikes
in the first quarter, a 25
-
basis point
(0.25%)
increase in both February and March, the overnight target rate is now in a range of 4.75% to 5.00%.
The U.S. labor market
remained quite strong as more than 1,000,000 new jobs were added in the quarter compared to 853,000 in the previous quarter.
The unemployment rate remained unchanged at
3.5%, underscoring the continued strength in the labor market. Some signs of cooling h ave emerged
with job openings falling below 10 million in February for the first time in nearly two years.
U.S. Treasuries have gone through one of the most volatile quarters in 15 years. The sharp fall in rates in
March
, following the bank failures,
was l
ed by the 2
-
year U.S. Treasury yield, which declined 104
basis points (
1.04%
) from its March closing
day
high of 5.07% to 4.03%
at the end of the quarter
.
Longer
-
term U.S. Treasury yields declined notable as well, but to a lesser extent,
and very short
-
ter
m
rates
rose slightly in response to Fed rate hikes
. T
he inversion in the yield curve
(measured by the
difference between the 2
-
year and 10
-
year U.S. Treasury yields)
steepened from an intra
-
quarter low
of
-
108
basis points (
-
1.08%)
to finish the quarter at
-
0. 56
%.
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
March
3 1
, 202
3 As a result of the falling yields, fixed income indices posted positive total returns for
the quarter.
The
ICE Bank of America Merrill Lynch 2
-
, 5
-
, and 10
-
year U.S. Treasury indices returned
1.43 %,
2.34 %,
and
3.70 %, respectively, for the quarter.
Source: Bloomberg
.
Portfolio Strategy and Performance
Bond markets witnessed unprecedented levels of
volatility in March stemming from the surprise
failures of Silicon Valley Bank and Signature Bank.
To mitigate risk, PFMAM proactively put most
financial issuers on hold and conducted a top
to bottom credit review of all approved financial issuers.
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
their target rate
.
Portfolio trade activity
focused on adding longer maturity securities to lock
in yields near their highest levels in 15 years
and
to maintain the portfolio’s duration position
.
New purchases were concentrated in the U.S. Treasury
sector;
however, high quality corporate notes were also added to the portfolio.
T
he portfolio
returned
strong absolute
performance for the quarter
, but under
performed the
benchmark
marginally
,
primarily
due to
the portfolio’s
shorter
duration position
when rates rose,
and
also due to its
allocation
to
corporate notes, as Treasures outperformed corporates fo r the quarter
.
Over the long
term, the portfolio
continues to return strong performanc
e
relative to the benchmark.
Maturity
3/31/23
12/31/22
Q over Q
Change
3 -
Mo.
4.75%
4.37%
+0.38
%
6 -
Mo.
4.88%
4.76%
+0.12
%
1 -
Yr.
4.62%
4.71%
-
0.09 %
2 -
Yr.
4.03%
4.43%
-
0.40 %
3 -
Yr.
3.79%
4.23%
-
0.44 %
5 -
Yr.
3.58%
4.00%
-
0.42 %
10 -
Yr.
3.47%
3.88%
-
0.41 %
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
March 31, 2023
March 31, 2022
December 31, 2022
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
March
3 1
, 202
3 Total Return Comparison
Periods Ending
March
31 , 202
3 Past
Quarter
Past
Year
Past
3 Years
Past
5 Years
City of Napa
1.75 %
-
0.21 %
-
0. 66
%
1.45 %
BofA Merrill Lynch 1
-
5 Year
Government Index
1.81 %
-
0.38 %
-
1.40 %
1.09 %
LAIF
Yield
0. 67
%
1. 72
%
0. 95
%
1. 4
8 %
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
March
31 ,
202
3 ,
invested funds
totaled
$
2 73
,8
25 ,
489
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,
f
ederal
a
gencies,
f
ederal
a
gency
commercial
mortgage
-
backed securities
(
CMBS
)
,
municipals,
s
upranationals,
c
orporate
notes
,
n
egotiable
c
ertificates of
d
eposit,
asset
-
backed securities
,
and
c
ash instruments such
as
CAMP
and LAIF. As noted in the
following chart
and on the attached investment detail report,
as
of
March
31 , 202
3 ,
approximately
7 7
%
o
f
the Ci
ty’s
investment portfolio
was
invested in
the State
Local Agency
Investment Fund (LAIF)
, the California Asset Management Program (CAMP)
,
and
high
-
q
uality
U.S. Treasury and
f
ederal
a
gency securities to maintain th
e focus on safety and liquidity.
Approximately
19 % of t
he portfolio
is
allocat
ed to high
quality credit instruments including
n
egotiable
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
March
3 1
, 202
3 The City’s Investment Policy allows for a 5
-
year time horizon with an emphasis on liquidity. As of
March
31 , 202
3 ,
30 % of the City’s funds were invested in very short
-
term
or overnight
investments,
2 7
% of the
funds were invested with maturities between
9 1
days and 2 years
, and
44 %
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 while max imizing returns on funds
not needed in the immediate future.
Federal Agencies
2%
Federal Agency
CMBS
1%
Municipals
3%
U.S. Treasuries
45%
LAIF and CAMP
30%
Certificates of
Deposit
1%
Corporate Notes
14%
Asset
-
Backed
Securities
4%
Supranationals
1%
Investments by Type
March 31, 2023
30%
1%
5%
21%
44%
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
March 31, 2023
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
March
3 1
, 202
3 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