City of Napa
Quarterly Investment Report
as of
September
30 , 202
3 Page
1 Introduction
This report represents the City’s investment portfolio as of
September
30 , 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
3 a
nd
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
s
tate investment pool known as the Local Agency Investment Fund (LAIF).
Current Market Conditions
The third
calendar
quarter was
characterized by the consumer continuing to spend,
supported by rising
wages and a strong labor market. The potential for additional
monetary policy tightening by the
Federal Reserve (Fed) remains possible in light
of the Fed’s projections for stronger gross domestic
product (GDP) growth, higher
inflation, and slightly lower unemployment for the balance of the year.
As interest
rates climbed to recent highs, equity markets declined from calendar year highs
and modest
de
-
risking swept markets near quarter
-
en
d.
The Fed met twice during
the quarter
, increasing the target rate 25 basis points (bps)
(0.25%)
in July
to a new range of 5.25% to 5.50% while holding that range steady following
the September meeting.
Despite the pause in September, the post
-
meeting dot
plot projections dominated headlines as
calendar year end 2024 and 2025 median
rate expectations were adjusted higher by 50 bps
(0.50%)
each, highlighting the reality of a
potentially “higher for much longer” interest rate environment .
A strong U.S. labor market remains a tailwind to economic growth and
consumer outlooks. Over the
quarter, the U.S. economy added 799,000 new jobs,
besting the
prior quarter
rate of 603,000 while
remaining well above the pre
-
COVID pace.
The unemployment rate (3.8%) remains near all
-
time lows
and the labor force
participation rate also trended upward and is now at the highest level since
the
pandemic.
Real GDP increased at an annual rate of 2.1% in
the second calendar quarter of
2023. Although slightly
slower than the
first quarter
2023 final release of 2.2%,
second quarter
growth was much higher than
originally expected in July and as a result caused the Fed to double their growth
projections for
calendar year 2023 to 2.1% from 1.0% three months ago.
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
September
30 , 202
3 Page
2 U.S. Treasury yields increased across the entire curve during the quarter
, with most
maturities
closing
the quarter at multi
-
decade highs. While the yield curve
remains
deeply inverted due to yields on the
front end reacting to several quarters of Fed
rate increases, more recent yield increases have been led by longer maturities.
Over the quarter, the yield on a 2
-
, 10
-
, and 30
-
year U.S. Treasury security
increased 15 bps, 73 bps,
and 84 bps, respectively, while the yield on a 3
-
month
U.S. Treasury Bill increased
by
1 5 bps. The
increase in the 30
-
year yield marked
the largest quarterly increase in more than 14 years. Along with the steepening
of the curve, the inversion of the yield curve became less severe by quarter -
end.
As a result of higher
absolute yields on longer
-
maturity tenors, U.S. Treasury
indexes with durations
greater than three years posted negative total returns in
the quarter
. The ICE BofA 5
-
, 10
-
, and 30
-
year U.S. Treasury indices returned
-
1.26%,
-
5.15%, and
-
12.75% respectively. On the flipside, along
with relatively muted rate
increases over the quarter, short
-
duration indices posted positive total
returns, as
higher income more than offset negative price impacts. The ICE BofA 3 -
month,
1 -
, and
2 -
year U.S. Treasury indexes retur
ned +1.31, +1.21%, and +0.54%
respectively.
Source: Bloomberg
.
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
September 30, 2023
September 30, 2022
June 30, 2023
Maturity
9 /30/23
6 /3
0 /23
Q over Q
Change
3 -
Mo.
5.4 5
%
5.30%
+0.15%
6 -
Mo.
5.47%
5.43%
+0.0
4 %
1 -
Yr.
5. 46
%
5.42%
+0.
04 %
2 -
Yr.
5. 05
%
4.90%
+0.
15 %
3 -
Yr.
4.84%
4.53%
+0.31%
5 -
Yr.
4.6 1
%
4.16%
+0.4
5 %
10 -
Yr.
4.5 7
%
3.84%
+0.7
3 %
Yield Curve History
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
September
30 , 202
3 Page
3 Portfolio Strategy and Performance
As markets continued to adjust expectations around higher rates for longer
and
recognizing that we
are nearing the end of the Fed’s rate hike cycle
, longer maturity, 3
-
to 5
-
year, securities were purchased
for the portfolio, in order to maintain its duration position and to lock in high interest rates for the next several years.
New purchases were diversified by sector and
issuer, with allocations to agency
commercial mortgage
-
backed
securities
, asset
-
backed securities, corporate notes,
and
negotiable CDs
i
ncreasing over the quarter
.
Though rates moved higher, total returns for the City’s portfolio and its benchmark were positive, as increased interest earnings offset any unrealized losses. The portfolio outperformed the benchmark for the quarter, due to its diversification, as non
-
Tre
asury sectors provided higher returns than
Treasuries.
Over the long
term, the portfolio
continues to return strong performanc
e
and to
outperform
the benchmark.
Total Return Comparison
Periods Ending
September
30 , 202
3 Past
Quarter
Past
Year
Past
3 Years
Past
5 Years
City of Napa
0. 36
%
2.70 %
-
1.3 3
%
1. 29
%
BofA Merrill Lynch 1
-
5 Year
Government Index
0.24 %
2.14 %
-
1.7 4
%
0. 93
%
LAIF
Yield
0. 89
%
2. 89
%
1. 31
%
1. 62
%
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
September
30 ,
202
3 ,
invested funds
totaled
$
2 63
,
360
,
105
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
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
September
30 , 202
3 Page
4 of
September
30 , 202
3 ,
approximately
6 5
%
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
31 % of t
he portfolio
is
allocat
ed to high
quality credit instruments including
n
egotiable
certificates of deposit
,
corporate notes
(
including bank notes
)
,
and asset
-
backed
securities
,
and
4 %
is
in municipal
obligations
and supranationals combined
.
The City’s Investment Policy allows for a 5
-
year time horizon with an emphasis on liquidity. As of
September
30 , 202
3 ,
27 % of the City’s funds were invested in very short
-
term
or overnight
investments,
1 1
% of the
funds were invested with maturities between
9 1
days and 2 years
, and
62 %
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
11%
Municipals
3%
U.S. Treasuries
25%
LAIF and CAMP
27%
Bank Note
1%
Certificates of
Deposit
2%
Corporate Notes
18%
Asset
-
Backed
Securities
10%
Supranationals
1%
Investments by Type
September 30, 2023
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
September
30 , 202
3 Page
5 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.
27%
<1%
3%
8%
62%
0%
10%
20%
30%
40%
50%
60%
70%
0 - 90 days
91 - 180 days
181 - 360 days
361 - 720 days
721 - 1825 days
Maturities in Days
September 30, 2023
ATTACHMENT 1