City of Napa
Quarterly Investment Report
as of June 30, 2023
Introduction
This report represents the City’s investment portfolio as of June 30, 2023. 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 2023 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 Market Conditions
In the second calendar quarter, economic conditions were characterized by : (1) ongoing recession risks; (2) regional bank concerns; (3) the Federal Reserve’s (Fed) historic pace of interest rate hikes; (4) stubbornly high inflation; and (5) a debt ceiling impasse in Washington.
The Fed followed up the two 25 basis point (0.25%) rate hikes in the first quarter with one more 25 basis point (b p) hike at the May Federal Open Market Committee (FOMC) meeting, bringing the overnight rate to a target range of 5.00% to 5.25%. At the June FOMC meeting, the Fed paused hiking, breaking the string of consecutive meetings with an increase at 10. The pause was accompanied by new Fed projections (the so called “dot plot”) which indicated the expectation for two more 25 bp rate hikes in the remain ing part of calendar year 2023, underscoring the Fed’s vigilance in fighting inflationary pressures.
The U.S. labor market remained strong and tight in the quarter. Over the quarter, the U.S. economy added 732,000 new jobs. Although the pace of job gains has trended lower over the past two years, job creation remains elevated compared to pre -pandemic levels. The unemployment rate closed the quarter at 3.6%, very near its 50-year low of 3.4% reached in April. Wage growth, measured by average hourly earnings, remains elevated at 4.4% year over year . But, the strength of the labor market has moderated slightly, as weekly unemployment claims have risen and the number of job openings has fallen from record highs.
U.S. Treasury yields jumped across the yield curve in the second calendar quarter, as economic data came in stronger than expected and markets capitulated to the Fed’s “higher-for-longer” trajectory for Attachment 1
City of Napa
Quarterly Investment Report
as of June 30, 2023
short term rates. Increases in the yield curve were led by the 2-year U.S. Treasury note, which finished the quarter at 4.90%, up 87 bps (0.87%) from 4.03% on March 31.
While yields of all maturities increased, the U.S. Treasury yield curve remains steeply inverted . The difference between the yield on the U.S. Treasury 2-year (4.90%) and 10-year note (3.84%) ended the quarter at over 100 bps (1.00%), marking one of the deepest levels of curve inversion in over 40 years.
As a result of higher yields across the board, fixed income indices posted negative total returns in the second calendar quarter, as unrealized market value losses due to rising rates were greater than realized earnings. The ICE Bank of America 2-, 5-, and 10-year U.S. Treasury indices returned -0.92%, -1.68%, and -1.93%, respectively.
Source: Bloomberg.
Portfolio Strategy and Performance
During the quarter, as yields increased, led by the nearly 100 bp increase in the 2 -year U.S. Treasury intra-quarter, the portfolio’s duration was gradually and methodically extended to capture these elevated yields. New purchases were diversified by sector and the overall portfolio diversification was increased as the Treasury allocation declined and the portfolio saw increases in the corporate, asset - backed security, and agency allocations.
While rising interest rates led to negative total returns for both the portfolio and its benchmark, the portfolio outperformed the benchmark. S trong relative returns from non-government sectors drove the portfolio’s outperformance versus the benchmark in the second calendar quarter. Over the long term, the portfolio continues to return strong performance and to outperform the benchmark.
Maturity 6/30/23 3/31/23 Q over Q
Change
3-Mo. 5.30% 4.75% +0.55%
6-Mo. 5.43% 4.88% +0.55%
1-Yr. 5.42% 4.62% +0.80%
2-Yr. 4.90% 4.03% +0.87%
3-Yr. 4.53% 3.79% +0.74%
5-Yr. 4.16% 3.58% +0.58%
10-Yr. 3.84% 3.47% +0.37%
Yield Curve History
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
3M 1Y 2Y 3Y 5Y 10Y
Maturity
U.S. Treasury Yield Curve
June 30, 2023 June 30, 2022
March 31, 2023
City of Napa
Quarterly Investment Report
as of June 30, 2023
Total Return Comparison
Periods Ending June 30, 2023
Past
Quarter
Past
Year
Past
3 Years
Past
5 Years
City of Napa -0.41% 0.25% -1.34% 1.30%
BofA Merrill Lynch 1-5 Year
Government Index -0.85% -0.42% -1.78% 0.89%
LAIF Yield 0.78% 2.32% 1.08% 1.54%
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 June 30, 2023, invested funds totaled $288,048,661 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 June 30, 2023, approximately 75% 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 th e 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.
City of Napa
Quarterly Investment Report
as of June 30, 2023
The City’s Investment Policy allows for a 5 -year time horizon with an emphasis on liquidity. As of June 30, 2023, 34% of the City’s funds were invested in very short -term or overnight investments, 17% of the funds were invested with maturities between 91 days and 2 years , and 49% 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 maximizing returns on funds not needed in the immediate future.
Federal Agencies
2% Federal Agency
CMBs
3%
Municipals
3%
U.S. Treasuries
36%
LAIF and CAMP
34%
Certificates of
Deposit
1%
Corporate Notes
14%
Asset-Backed
Securities
6%
Supranationals
1%
Investments by Type
June 30, 2023
34%
<1% <1%
17%
49%
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
June 30, 2023
City of Napa
Quarterly Investment Report
as of June 30, 2023
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.