City of Napa
Quarterly Investment Report
as of December 31, 2023
Introduction
This report represents the City’s investment portfolio as of December 31, 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
The fourth calendar quarter was characterized by economic resilience but expectations for a modest slowdown, cooling inflation that remains above the target set by the Federal Reserve (Fed), the labor market coming into better balance, and consumers that continue to support U.S. economic growth through spending.
The Fed kept the overnight target rate at its current range of 5.25% to 5.50% at its December 13 meeting and indicated that the historic 2022-23 hiking cycle had likely come to an end. The Fed also messaged a more dovish policy stance for 2024 as its updated “dot plot” showed three 25 basis points (bps) (0.25%) rate cuts for the year, which was more than previously projected. Yields fell significantly as a result, and the quarter was defined by a strong rally in both equities and bonds.
Real GDP expanded at an annualized pace of 4.9% in the third calendar quarter of 2023, after a 2.1% increase in the second quarter. The increase in the third quarter reflected upticks in most segments, underscoring the resiliency of the U.S. economy. Estimates for 2024 indicate quarterly expectations on average of less than 1%, although positive, a confirmation of a slower pace of growth for the foreseeable future.
Although only slightly, U.S. inflation (as measured by CPI) continued to trend lower in the quarter as both headline and core inflation (which excludes food and energy) continued to decline from their peaks in mid -2022. Shelter costs – the average household’s biggest expense – accounted for nearly 70% of the total increase in core CPI over the past year as home prices remain elevated.
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of December 31, 2023
After peaking in October, a more dovish Fed and increased likelihood that the overnight target rate has reached its cycle-high drove interest rates lower through the quarter. By the end of the year, the yield on a 2-year U.S. Treasury reached a 7-month low of 4.25%, while the 10-year U.S. Treasury note ended the year at 3.88%. Over the quarter, the yield on 2-, 5-, and 10-year U.S. Treasuries declined 80 bps, 76 bps, and 69 bps, respectively. Even the yield on a 3 -month U.S. Treasury Bill declined by 11 bps, reflecting how aggressively markets have begun pricing in potential Fed rate cuts in the first half of 2024.
As a result of notably lower yields, bond markets posted one of the best quarters over the past several decades. The ICE BofA 2-, 5-, and 10-year U.S. Treasury indices returned 2.44%, 4.41%, and 6.60% 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
December 31, 2023
December 31, 2022
September 30, 2023
Maturity 12/31/23 9/30/23 Q over Q
Change
3-Mo. 5.34% 5.45% -0.11%
6-Mo. 5.27% 5.47% -0.20%
1-Yr. 4.77% 5.46% -0.69%
2-Yr. 4.25% 5.05% -0.80%
3-Yr. 4.04% 4.84% -0.80%
5-Yr. 3.85% 4.61% -0.76%
10-Yr. 3.88% 4.57% -0.69%
Yield Curve History
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of December 31, 2023
Portfolio Strategy and Performance
As it continued to become clearer that the end of the Fed’s historic hiking cycle was at or coming to an imminent end, we maintained the portfolio’s duration at a neutral position relative to the benchmark duration. New purchases were focused in securities with maturities of 3 - to 5 - years, locking in current high interest rates for the next several years. Given the positive economic outlook, strong labor market, and continued strength of the consumer, our general view on non -government sectors remained constructive. As a result, additional investment grade corporates, AAA-rated asset- backed securities, and agency-backed mortgage securities were purchased for the portfolio.
The decline in interest rates during the quarter, coupled with higher yielding securities, resulted in strong total return performance for both the City’s portfolio and its benchmark , for the past quarter and past year . The portfolio outperformed the benchmark due to its diversification and duration position, relative to the benchmark. Over the long term, the portfolio continues to return strong performance and to outperform the benchmark.
Total Return Comparison
Periods Ending December 31, 2023
Past
Quarter
Past
Year
Past
3 Years
Past
5 Years
City of Napa 3.19% 4.95% -0.38% 1.66%
BofA Merrill Lynch 1-5 Year
Government Index 3.09% 4.32% -0.75% 1.20%
LAIF Yield 0.99% 3.37% 1.59% 1.70%
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, 2023, invested funds totaled $285,453,578.10 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 (including bank notes), negotiable certificates of deposit, asset-backed securities, and ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of December 31, 2023
cash instruments such as CAMP and LAIF. As noted in the following chart and on the attached investment detail report, as of December 31 , 202 3, approximately 67% of the Ci ty’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 30% of the portfolio is allocated to high quality credit instruments including negotiable certificates of deposit, corporate notes (including bank notes), and asset-backed securities, and 3% 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 December 31 , 202 3, 30% of the City’s funds were invested in very short -term or overnight investments, 12% of the funds were invested with maturities between 91 days and 2 years, and 58% 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
12%
Municipals
2%
U.S. Treasuries
23%
LAIF and CAMP
30%
Bank Note
1%
Certificates of
Deposit
2%
Corporate Notes
18%
Asset-Backed
Securities
10%
Supranationals
<1%
Investments by Type
December 31, 2023
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of December 31, 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. 30%
<1% 2%
10%
58%
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
December 31, 2023
ATTACHMENT 1