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ATTACHMENT 1
Introduction
This report represents the City’s investment portfolio as of June 30, 2026. 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 approved by the City Council in June 2026 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 second quarter of 2026 began with heightened concerns surrounding the conflict in the Middle East, rising energy prices, and inflationary consequences of supply disruptions. As the quarter progressed, easing geopolitical tensions and a pullback in oil prices improved investor sentiment, allowing markets to refocus on economic fundamentals and monetary policy.
Economic growth remained supported by business investment, while consumer spending made its weakest contribution to gross domestic product (GDP) in several years. Declining savings rates and slowing wage gains suggest continued moderation in consumption. Technology, software, and AI-related capital expenditures continue to support business activity and productivity expectations. At the same time, strong demand for computing infrastructure has contributed to inflationary pressures in select technology segments. We expect economic growth to remain near current trends, with business investment offsetting signs of moderating consumer demand.
Labor market conditions normalized as payroll growth slowed and wage gains moderated, particularly among lower-income households. Despite this cooling, job openings remained elevated and layoffs historically low, reinforcing a “lowhire, low-fire” environment. While conditions are softening, we view the labor market as normalizing rather than deteriorating.
Yields on 3-month, 2-year, and 10-year U.S. Treasuries ended June at 3.82%, 4.18%, and 4.47%, representing changes of +14 bps, +38 bps, and +15 bps, respectively, over the past quarter.
Maturity
6/30/2026
3/31/26
Q over Q
Change
3-Mo.
3.82%
3.67%
0.15%
6-Mo.
3.97%
3.70%
0.27%
1-Yr.
3.98%
3.66%
0.32%
2-Yr.
4.18%
3.79%
0.39%
3-Yr.
4.18%
3.82%
0.36%
5-Yr.
4.23%
3.94%
0.29%
10-Yr.
4.47%
4.32%
0.15%
Yield Curve HistoryYield Curve History
Yield Curve History
Yield Curve History
Source: Bloomberg Finance LP.
Portfolio Strategy and Performance
At quarter end, the portfolio’s duration was 2.54 years, which was 103% of the benchmark duration. We continued to manage the portfolio’s duration at this near neutral position relative to the benchmark duration. Investment-grade corporate bonds benefited from strong investor demand and healthy corporate fundamentals. Credit spreads tightened toward historically rich valuations, supporting excess returns during Q2. While fundamentals remain favorable, limited spread compression remains. We expect income generation and carry to be the primary contributors to returns going forward.
Bond indices delivered mixed performance during the quarter as rising yields weighed on valuations, while elevated income supported returns. The ICE BofA 3-month and 2-year U.S. Treasury indices returned 0.88% and 0.27%, respectively. The 5-year U.S. Treasury index declined 0.17%, while the 10-year returned 0.13%, as higher income in longer maturities helped offset valuation headwinds.
Both the City’s portfolio and its benchmark also returned positive performance for the quarter, and the portfolio outperformed the benchmark due to its sector diversification. The portfolio generated strong performance for the past year, and, over the long term, the portfolio continues to return good performance and to outperform the benchmark.
Total Return Comparison
Periods Ending March 31, 2026
Past
Quarter
Past
Year
Past
3 Years
Past
5 Years
City of Napa
0.42%
3.15%
4.77%
1.93%
ICE BofA 1-5 Year
Government Index
0.24%
2.71%
4.31%
1.52%
LAIF Yield
1.31%
4.16%
4.20%
3.14%
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 averaged over respective time periods Portfolio Information
The City’s cash, excluding bond proceeds, is pooled for investment purposes. As of June 30, 2026, invested funds totaled $295,503,901.04 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 agency commercial mortgage-backed securities (CMBS), municipals, corporate notes (including bank notes), negotiable certificates of deposit, asset-backed securities, and cash instruments such as CAMP and LAIF and bank notes. As noted in the following chart and on the attached investment detail report, as of June 30, 2026, approximately 56% 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 the focus on safety and liquidity. Approximately 44% 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 less than 1% is in municipal obligations.
The City’s Investment Policy allows for a 5-year time horizon with an emphasis on liquidity. As of June 30, 2026, 26% of the City’s funds were invested in very short-term or overnight investments, 26% of the funds were invested with maturities between 91 days and 2 years, and 74% 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.
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 cash flow needs) and longer-term maturities (to realize a higher rate of return) is appropriate given the current market conditions.
City of Napa
Quarterly Investment Report
as of June 30, 2026