City of Napa
Quarterly Investment Report
as of
March 31, 2024
Page
1 Introduction
This report represents the City’s investment portfolio as of
March 31, 2024
. 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
first
calendar
quarter was characterized by
strong r
obust growth as markets have adjusted their
expectations to only 2 to 3 cuts in 2024, in lieu of the anticipated 6 cuts as we entered the new year; s
ticky inflation that remains above the Federal Reserve (Fed)’s 2% target; l
abor markets
that
continu
e
to show impressive job gains and low unemployment; and
r
esilient consumer spending supported by
wage growth that is outpacing inflation.
The Federal Reserve (Fed) left the target range for the federal funds rate unchanged at the March FOMC meeting (5.25% to 5.50%). The Fed also released the quarterly update to its Summary of Economic Projections, which continued to show three rate cuts in c alendar year 2024, but one less
cut in 2025. During the press conference, Fed Chair Jerome Powell reiterated that the Fed needs greater confidence that inflation is moving sustainably down toward its 2% target before reducing rates. It would also like to s
ee the labor market move into better balance. Stubborn inflation and stronger fundamental economic data will likely delay any rate cuts until later in the year.
The final reading for Q4 real gross domestic product (GDP) came in at 3.4%, which was slightly higher than previous estimates. Consumer spending rose at a 3.4% pace in Q4, even better than Q3’s robust 3.1% growth rate.
U.S. inflation
readings
(as measured by CPI)
were mixed
in March
: the year
-
over
-
year (YoY) change
in the Consumer Price Index (CPI) fell by 0.1% to 3.8%, while the Personal Consumption Expenditures Price Index (PCE) rose slightly to 2.5% in February. In a reversal of recent trends, PCE goods prices rose faster than pri
ces in the services sector largely due to rising energy prices. Housing ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
March 31, 2024
Page
2 and utilities inflation remained elevated. The YoY change in Core PCE (which excludes volatile food and energy components) fell slightly to 2.8%, marking the fourteenth consecutive month of declines.
Despite trading over a 20
-
30 basis point (bps) range during March, U.S. Treasury yields finished the month relatively
unchanged. Short
-
term yields (less than three months) remained above 5%, while the yield curve remained deeply inverted with shorter maturities continuing to outyield longer ones.
The
yields on benchmark 2
-
, 5
-
, and 10
-
year U.S. Treasuries ended the month at 4.62%, 4.21%, and 4.20%, respectively, representing changes of 0,
-
3, and
-
5 bps for the month, respectively.
As a result of modest month
-
over
-
month yield changes, income was the primary driver of returns for the month. The ICE BofA 2
-
, 5
-
, and 10
-
year Treasury indices returned 0.31%, 0.47%, and 0.63%, 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
March 31, 2024
March 31, 2023
December 31, 2023
Maturity
3 /3
1 /2
4 12/31/23
Q over Q
Change
3 -
Mo.
5.36%
5.17%
0.19%
6 -
Mo.
5.32%
5.27%
0.05%
1 -
Yr.
5.02%
4.91%
0.11%
2 -
Yr.
4.62%
4.30%
0.32%
3 -
Yr.
4.41%
4.04%
0.37%
5 -
Yr.
4.21%
3.85%
0.36%
10 -
Yr.
4.20%
3.89%
0.31%
Yield Curve History
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
March 31, 2024
Page
3 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,
lock
ing
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 con
structive. 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
performanc
e
and to outperform
the benchmark.
Total Return Comparison
Periods Ending
March 31, 2024
Past
Quarter
Past
Year
Past
3 Years
Past
5 Years
City of Napa
0.20%
3.35%
-
0.18 %
1.38%
BofA Merrill Lynch 1
-
5 Year
Government Index
-
0.01%
2.45%
-
0. 58
%
0.96%
LAIF
Yield
0. 9
9 %
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
March
31, 2024
,
invested funds
totaled
$
307
,
137,678.78
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
(including bank notes)
,
n
egotiable
c
ertificates of
d
eposit,
asset
-
backed securities
,
and
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
March 31, 2024
Page
4 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, 2024
,
approximately
70 %
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
28 %
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
2 %
is in municipal
obligation
s
.
The City’s Investment Policy allows for a 5
-
year time horizon with an emphasis on liquidity. As of
March 31, 2024
,
3 5
%
of the City’s funds were invested in very short
-
term
or overnight
investments,
1 4
%
of the
funds were invested with maturities between
9 1
days and 2 years
, and
5 1
%
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
<1%
Federal Agency
CMBs
11%
Municipals
2%
U.S. Treasuries
23%
LAIF and CAMP
35%
Bank Note
1%
Certificates of
Deposit
2%
Corporate Notes
16%
Asset
-
Backed
Securities
10%
Investments by Type
March 31, 2024
ATTACHMENT 1
City of Napa
Quarterly Investment Report
as of
March 31, 2024
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.
35%
<1%
1%
12%
51%
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
March 31, 2024
ATTACHMENT 1