presented by: lauren brant - managing director pfm asset management llc february 23, 2006 execute...

Presented by:

Lauren Brant - Managing DirectorPFM Asset Management LLC

February 23, 2006

Execute the Plan

Preliminary Considerations

Presenter: Lauren Brant—Managing Director, PFM Asset Management

• U.S. Government Obligations

• Federal Agency Obligations

• Taxable Municipal Obligations

• Repurchase agreements

• Commercial paper

• Bankers’ Acceptances

• Corporate Notes

• Mortgage-Backed Securities

• Negotiable Certificates of Deposit

• Mutual Funds investing in securities listed above

• Money Market Fund

• Local Agency Investment Fund (LAIF)

Look At Universe of Available Investments


Ensure Appropriate Diversification

• Pay attention to sector diversification prior to placing investments.

U.S. Treasury

15%

Corporate

10%

LAIF

10%

Commercial Paper

10%

Federal Agency

55%

• Just as important is ensuring that you have good issuer diversification.

U.S. Treasury15%

FHLB20%

FHLMC15%

Wells Fargo5%

Citigroup 5%

LAIF10%

GECC5%

UBS Finance DE5%

FNMA20%


Track Corporate Credits

• Establish procedures to monitor corporate obligations after initial purchase.

Source: Bloomberg

Have a View of the Market


Bernanke Testimony May Further Invert Yield Curve

“Testimony to Congress could push longer-dated yields further below their shorter-dated counterparts”

Feb 14, 2006

Will Rates Continue to Rise?


2-Year U.S. Treasury NoteJanuary 1, 2005 – February 10, 2006

Source: Bloomberg

Current Interest Rates


2-Year Federal Agency NoteJanuary 1, 2001 – February 3, 2006

Source: Bloomberg

Major Bull Market Bear Market

9/11

Yields hit 50-year lows

Historical Perspective

Market anticipates beginning of interest rate hikes

12/27Yield Curve

Inverts


Yield Curve

U.S. Treasury Yield Curve January 1, 2001 vs. December 31, 2001

Source: Bloomberg

December 31, 2001

January 1, 2001


Monetary Policy

Fed Funds Target RateJanuary 2000 – June 2006

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Source: Bloomberg

4.50%

Tools to Help You Make Good Investment Decisions


How Do You Know Where to Begin?

• Tools to help you decide what to do in these uncertain times.

– Breakeven analysis

– Forward-yield curve

– Spread analysis

– Option-adjusted spread analysis

– Sensitivity analysis (stress test)

– Judgment


Selecting the Best Maturity Range

• In the current market, should you buy short or long?

– Which would you buy?

• 6-month Agency @ 4.80%

• 1-year Agency @ 4.93%

Rates as of February 13, 2006


Breakeven Analysis

• Frame the question differently

– What rate do you have to earn for the last 6 months to breakeven?

Time=0 Time=6 months Time=1 year

4.80% ??

4.93%


Breakeven Analysis


4.80% for 6 months ?? for 6 months

4.93% for 1 year

5.06%

4.93 * 1 year = (4.80 * ½ year) + (x * ½ year)

4.93 = 2.40 + ½ x

2.53 = ½ x

5.06 = x


Breakeven Analysis

• Do you think that rates will rise more than 26 basis points in the next 6 months?

– If yes, buy the 6-month investment

– If no, buy the 1 year


4.80% 5.06%

4.93%


Breakeven Analysis

• How could you know if rates will rise more than 26 basis points in the next 6 months?

– Frame the question differently

• There are 3 Fed meetings in the next 6 months.

• Is it likely that Fed will raise rates 25 basis points at 1 of the 3 meetings?

– If yes, then the 6-month is a good choice.

– If no, then the 1-year is a good choice.


Yields Among Various Sectors

U.S. TreasuryNon-Callable

Federal AgencyAA

Corporate

6-month 4.69% 4.76% 4.93%

1-Year 4.74% 4.97% 5.12%

2-Year 4.70% 4.91% 5.17%

3-Year 4.67% 4.94% 5.19%

5-Year 4.60% 4.96% 5.22%



Value Between Treasury and Agency

Spread Between 2-Year U.S. Treasury and 2-Year Federal AgencyJanuary 1, 2001 – February 10, 2006

Source: Bloomberg

Average 28 basis points

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06

Sp

rea

d


Value Between Treasury and Agency2005 to Today

Spread Between 2-Year U.S. Treasury and 2-Year Federal AgencyJanuary 1, 2005 – February 10, 2006

Source: Bloomberg

Sp

rea

d

Buy Agencies

Buy Treasuries


0.15%

0.19%

0.23%

0.27%

0.31%

0.35%

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06


Sp

rea

dValue Between Agency and Corporate

Spread Between 2-Year Federal Agency and 2-Year “AA” CorporateJanuary 1, 2001 – February 10, 2006


Source: Bloomberg

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06


Sp

rea

d

0.06%

0.10%

0.14%

0.18%

0.22%

0.26%

0.30%

0.34%

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06

Value Between Agency and Corporate2004 to Today

Spread Between 2-Year Federal Agency and 2-Year “AA” CorporateJanuary 1, 2005 – February 10, 2006


Buy Agencies

Buy Corporates

Source: Bloomberg


Cost of Liquidity

1-Month Prime Commercial Paper vs. LAIFJanuary 1, 2004 – February 3, 2006

Source: Bloomberg

0.5%

1.3%

2.0%

2.8%

3.5%

4.3%

5.0%

Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06

S&P Rated Federal LGIP

3-month Commercial Paper


Broker Security NameMaturity

Date Call DateYield to Maturity

Yield to Call Price

Broker ANew Issue FHLMC

Coupon 5.12%2/27/08 2/27/07 5.12% 5.12% 100.000

Broker BFNMA

Coupon 5.10%2/22/08 2/22/07 5.15% 5.21% 99.898

Difference 5 days 5 days3 basis points

9 basis points

9 basis points x $5 mm x 1 Year = $ 4,500

3 basis points x $5 mm x 2 Years = $ 3,000

BROKER’S FEE FOR THE NEW ISSUE = $7,500

Primary Versus Secondary Market



Offered Offered Difference OverBroker Yield Price Principal Low Price

Broker A 3.40% 99.221 $1,984,426 $4,503

Broker B 3.42% 99.165 $1,983,299 $3,377

Broker C 3.44% 99.109 $1,982,173 $2,250

Broker D 3.46% 99.052 $1,981,047 $1,125

Broker E 3.48% 99.996 $1,979,922 $0

Competitive Shopping Adds Value

• Sample Trade, BUY:

– FNMA, coupon 3.125%, December 15, 2007, par $2,000,000


Implementation Timeline

Source: Bloomberg

2-Year U.S. Treasury NoteJanuary 1, 2005 – February 10, 2006

presented by: lauren brant - managing director pfm asset management llc february 23, 2006 execute...

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