Using the FundamentalsUsing the Fundamentals

Linda T. PattersonPatterson & Associates

linda@patterson.net

The In estment DecisionThe In estment DecisionThe Investment DecisionThe Investment Decision

Where do I need money? A: cash flow What can I buy? A: authorized securities Am I diversified? A: policy Am I diversified? A: policy

Where is the market?h h Where are the rates going?

What has the best yield? A: relative value

Relative Value Analysis is = Comparative Shopping Yield is our common denominator to compare alternatives Yield is our common denominator to compare alternatives

St ategiesSt ategiesStrategiesStrategies

Dependent first off on your cash flow

Dependent on your risk tolerance Dependent on your risk tolerance

Dependent on your policy limits

Dependent on your economic view Will rates go up?

Wh ill it ? When will it go up? How far will it go? What part of the curve will go up?

A Major Change FactorA Major Change FactorA Major Change FactorA Major Change Factor• What is driving the rates and markets currently?• What factors will change outlooks?

1 001.00

Jun-14

0.50

Mar-14

Oct-13

Jul-13

Jun-12

#REF!

0.003mo 6mo 1yr 2yr 3yr

Public entities operate primarily in this area of the curve.

At Today’s RatesAt Today’s RatesyyWhat do You Do?What do You Do?

$15mm are in Texpool You need $500,000 a month$ ,

You have a safekeeping account at bankYou have a safekeeping account at bank

You have little time You have little time

St ateg E e ciseSt ateg E e ciseStrategy ExerciseStrategy Exercise

Portfolio Low $30mm High $60mm

100% liquid now50

60

100% liquid now Need $2mm/month

Bond Funds 30

40

milliBond Funds

25% of ptf. Expected life 1yr.

b 10

20

30ions Debt svc

Feb & Aug $8mm/$4mm 0

10

Cash Flow – Multiyear View

T d ’ Q ti /C id tiT d ’ Q ti /C id tiToday’s Questions/ConsiderationsToday’s Questions/Considerations

Questions: When do I first need money? How should I use my Sept allotment? How should I use my Sept. allotment? How will I use the tax money? Can I invest the bond money better? What is with this core? What is with this core?

Rates: o/n 0.10% 3 mo 0.11% 6 mo 0.30% 9 mo 0.30% 12 mo 0.45% 18 mo 1.00%

A St ateg Fo msA St ateg Fo msA Strategy Forms…A Strategy Forms…

Bond funds (approx. $7.2mm) Leave $3.6 liquid Invest $1 8 to 6 mos and $1 8 to 9 mos Invest $1.8 to 6 mos. and $1.8 to 9 mos.

Debt SvcInvest $4mm to Feb (rest to come from taxes) Invest $4mm to Feb (rest to come from taxes)

Invest $4mm to Aug to fulfill Aug payment

Operating Funds Leave $24mm liquid to fund Sept. through Dec $3mm remaining invested out to April (8 mos.)$ g p ( )

Plan E ec tionPlan E ec tionPlan ExecutionPlan Execution

Target the beginning of each month At maturity leave funds liquid for expenses

Without a s/k account CDs from TX banks CDARS C S Money market accounts

With a s/k account With a s/k account CDs from TX banks Municipal debt in the 6 mo to 18 month area Treasuries or agenciesg

E al ating the ChoicesE al ating the ChoicesEvaluating the ChoicesEvaluating the Choices

Sector analysis assuming that similar sectors are similar

which issuers are available wanted which issuers are available, wanted

Spread analysis Spread analysis which maturity range is best which bond is best in that maturity

Yield curve analysis where are rates now where are rates now where are rates going

Sp ead Anal sisSp ead Anal sisSpread AnalysisSpread Analysis Spread means difference

Difference in rate between securities or market sectors

Spreads are dynamic8

Spreads are dynamic Anticipated spreads on credit Current spreads

7TreasAgyCP

Historical spreads

Doing a spread analysis means comparing rates

63mo 6mo 1yr 2yr

Doing a spread analysis means comparing rates

You must check the rates at that maturity in various sectors You must check the rates at that maturity in various sectors

Secto Anal sisSecto Anal sisSector AnalysisSector Analysis

Market sectors are the different types of securities Treasuries, agencies, CP, CD, pools

Sectors vary by risk and structure agencies and new agency issuesg g y commercial paper taxable municipals

Evaluating sectors requires information on that sector credit decisions and risks historical spread analysis

Yield C e Anal sisYield C e Anal sisYield Curve AnalysisYield Curve Analysis

Yield curves depict the market conditions Shows the markets expectations and demands Tells a storyTells a story Illustrates the best value Read in light of current conditions

Picking the best place on the curve Your portion of the curve is restricted by policy Your portion is restricted by risk tolerance and cash flow Your portion is restricted by risk tolerance and cash flow

Yield CurveYield Curve

5

6

5/26/06

3

4

01/01/08

1

2 10/15/0810/15/09

0o/n 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 10 yr 30 yr

T-Bills T-Notes T-Bond

Yi ld C NYi ld C NYield Curve NuancesYield Curve Nuances

7.00

SteepnessCheap

5 00

6.00p

Value

pFlat

4.00

5.00

Pick-upRich

3.003 Mo 6 Mo 1 Yr 2 Yr 5 Yr 10 Yr 30 Yr

Relati e Val e b YieldRelati e Val e b YieldRelative Value by YieldRelative Value by Yield A core investment out 1.5 years… A core investment out 1.5 years…

T-Note 0.28 % FNMA 0.35 % FHLMC 0.33 % FHLB Call 0 40 % FHLB Call 0.40 % CD 0.95 %

What are your considerations ? What are your considerations ? How far do you feel safe going?

Which do o do toda ?Which do o do toda ?Which do you do today?Which do you do today?

Debt Service Strategizing

It is June 15th It is June 15th

Your Aug debt service payment is fully fundedg p y y

The Feb payment is $3,000,000

What are your options? Your plans?

Debt Se ice 2/15/14Debt Se ice 2/15/14Debt Service 2/15/14Debt Service 2/15/14

Pool will probably yield average 0.04% to 0.06% Proceeds $ 750 for six months

Money market account at 0.35% Proceeds $ 5,250 for six months

CD for 6 months should be 0.30% Proceeds $ 4,500 for six months

Agency discount note at 0.15% Proceeds $ 2,250 for six months

St t i t hSt t i t h dj tdj tStrategies must change Strategies must change –– so adjustso adjust

Jan 2001 – Jan 2002 Overnight rates move from 6.50% to 1.00% Need to lock-in rates as long as reasonable Going long was primary strategyGo g o g as p a y st ategy

June 2004 – June 2005 Overnight rates move from 1.00% to 3.00% Need to move up with the rates Need to move up with the rates Staying short was primary strategy

Sept 2008 – Sept 2009 Overnight rates move from 2 0% to 0% Overnight rates move from 2.0% to 0% Need to lock in rates and look for alternatives Going long was primary strategy

Disciplined InvestingDisciplined InvestingDisciplined InvestingDisciplined InvestingEven Infrequent Investors Need ItEven Infrequent Investors Need It

Horizon investingg Chose the time period

Month or quarter periods

h Stay to your horizon

Consistently cover next disbursement Consistently cover next disbursement Create liquidity buffer as you go

Create a ladder to pay upcoming liabilities Create a ladder to pay upcoming liabilities

In estmentsIn estmentsInvestmentsInvestments

Investments are not just longer term Every dollar every day is an investment

Investments are not locked in Basically all investments can be sold

Investments are designed to pay your bills Cash flow planning tells us where market swings become irrelevant once investment is made

Investments in place on a ladder creates earnings Investments in place on a ladder creates earnings

Passi e ManagementPassi e ManagementPassive ManagementPassive Management

Passivity No unnecessary action: liquid reliance Defensible and easy Will mirror the lowest rates available

Passive Conservative Based on facts: cash flow needs/core Conservative with liquid buffers Targets month-by-month needs Usually stays within one year horizon Occasionally given to fits of agony Increases portfolio yields

The Pie and the Po tfolioThe Pie and the Po tfolioThe Pie and the Portfolio The Pie and the Portfolio

Liquid Sector Provides liquidity Alternatives

Bank demand deposits Local government pools Money market mutual funds

O i ht h t Overnight repurchase agreements Today’s strategy

Short-Term Match upcoming known expenditures Alternatives – in different scenarios

Securities (discount notes CDs some liquidity options) Securities (discount notes, CDs, some liquidity options)

The Pie and the Po tfolioThe Pie and the Po tfolioThe Pie and the Portfolio The Pie and the Portfolio

Long-Term Ultimately matching known expenditures

becomes the short-termbecomes the short term Usually 6 to 12 months Alternatives directed by market yields Today’s strategy Today s strategy

Core Reserves no planned shorter term use Reserves, no planned shorter term use Focus on rate movements and yield May call for different securities Today’s strategy Today s strategy

T o Vie s to the St ct eT o Vie s to the St ct eTwo Views to the StructureTwo Views to the Structure

$7 0

$8.0

$9.0

$4 0

$5.0

$6.0

$7.0

Liquid20%Long

20%

Core10%

$1 0

$2.0

$3.0

$4.0Short50%

$0.0

$1.0

Debt Se ice Cash FloDebt Se ice Cash FloDebt Service Cash FlowDebt Service Cash Flow

Liq iditLiq iditLiquidityLiquidity

Liquidity funds must provide Funds availability Reasonable return Ease of use Reporting

Used fo long te m liq idit in ising ate en i onment Used for long term liquidity in rising rate environment Used for short-term liquidity facilitating choice of securities

Bank Liq idit ChoicesBank Liq idit ChoicesBank Liquidity ChoicesBank Liquidity Choices

A range of choices non-interest bearing checking interest bearing checking money market accounts sweeps

Dependent on risk/access Dependent on risk/access

Sweeps as an InvestmentSweeps as an InvestmentSweeps as an InvestmentSweeps as an Investment

Account A Excess amounts sweep each day not entire amount.

Daily SweepAccount B

Daily Sweep

to MMMF

Account C Make sure your policyAccount C Make sure your policy includes MMMF as authorized investment

Liq idit ChoicesLiq idit ChoicesLiquidity ChoicesLiquidity Choices

Local Pools “Money Market Mutual Funds” (MMMF) Repurchase Agreements (larger entities) Repurchase Agreements (larger entities) Bank Options

checking accounts, b interest bearing accounts,

money market accounts, Sweeps to money market funds

Risk and return variations on each choice

Liq idit ChoicesLiq idit ChoicesLiquidity ChoicesLiquidity Choices

Where would you put $2mm?

Alternatives: O/N Repo Rate 0.04 O/N Repo Rate 0.04 MMMF or $1 Pool Rate 0.04 Bank checking 0.01g Bank money market account 0.18 Bank sweep to MMMF 0.00p

The 14 extra bps buys you $2,800 a year.

Commingled InvestmentsCommingled InvestmentsCommingled InvestmentsCommingled Investments

Local Government Pools

M M k M l F d Money Market Mutual Funds Mutual Funds

All offer: Economy of scale Economy of scale Diversification Some extension with liquidityq y Reporting

Pools and F nds P o idePools and F nds P o idePools and Funds ProvidePools and Funds Provide It’s all about disclosure It s all about disclosure

Information statements Prospectusp Full Information

Confirmations Transaction History

ReportsM thl Hi t Monthly History

All requirements built on SEC requirements for MMMF

What do these figures tell you?

Know how to read the facts aboutthe facts about your pool(s).

Pools and F ndsPools and F ndsPools and FundsPools and Funds

Pools Money Market Funds

Based on ILCA Require resolution by

SEC registered No resolution requiredRequire resolution by

Board Rated

No resolution required SEC oversight and

regulation Unregulated All types

g Strict restrictions

based on liquidity All typesonly

Pools s F ndsPools s F ndsPools vs FundsPools vs Funds

You are not “insured” in either

Pools require a resolution and certification

A t it th ti Are not a security – they are a cooperative

Funds Funds Need to be in your policy Do not require resolution or certification They are a registered security

Fund/Pool TypesFund/Pool TypesFund/Pool TypesFund/Pool Types Constant dollar funds/pools

Strive to maintain $1 asset (share) value Money market equivalent – known as 2a-7 funds

Net asset value funds/poolsShare value fluctuates on market price Share value fluctuates on market price

Mutual fund equivalents – potential loss of principal

ConstantNAV

1 2 3 4 5 6 7 8 9 10 11 12

Pools Pools –– Know what they are..Know what they are..yyRead the information statementRead the information statement

Most pools are constant dollarp Texpool I and II Logic ClassC ass TASB – Liquidity TexStar

Some pools are mutual funds

Some are a hybrid Some are a hybrid

It’s your job to know Have accounts at more than one pool Have accounts at more than one pool

T pes of MMMFT pes of MMMFTypes of MMMFTypes of MMMF MMMF are regulated securities

maximum maturity 13 months Maximum WAM of 60 days

Types of MMMF Treasury

US Treasury Obligations & repo with treasuries US Treasury Obligations & repo with treasuries Government

US treasuries and agencies & repo backed by treasuries and agencies Enhanced Government Enhanced Government

Same as Government but including CP Prime

treasuries agencies CP BA or corporate to 5% repo treasuries, agencies, CP, BA, or corporate to 5%, repo

Ne SEC R les fo MMMFNe SEC R les fo MMMFNew SEC Rules for MMMFNew SEC Rules for MMMF

New regulations are directed towards safety, liquidity and stability

Minimum 10% in securities convertible to cash in 1 dayy Minimum 30% in securities convertible to cash in 1 week

Maximum WAM shortened to 60 daysMaximum WAM shortened to 60 days Maximum WAL of 120 days

weighted average life to reduce use of variables

Monthly reporting to SEC on shadow prices

Create procedures for stress tests Create procedures for stress tests

Ne R les fo MMMFNe R les fo MMMFNew Rules for MMMFNew Rules for MMMF

Repo collateralized with US Obligations or cash only

Ability to process at price not $1y p p $

Maximum 3% in second tier securities (higher risk securities) from 5%from 5%

Maximum of 5% in illiquid securities

Know Your Investor requirements added Know Your Investor requirements added

Ability to suspend redemptions to prepare for liquidation

P oposed Mone Ma ket R lesP oposed Mone Ma ket R lesProposed Money Market RulesProposed Money Market Rules

SEC is out for comment now

Sec wants to turn PRIME money funds into mutual funds Not strive to maintain $1 Fluctuate with market values (price) Fluctuate with market values (price) Can reflect principal loss

A h f ? Wh d li ? Are they for you? What does your policy say? Money market mutual funds, excluding prime funds. Money market funds which strive to maintain a $1 NAV.y $

MMMF Conside ationsMMMF Conside ationsMMMF ConsiderationsMMMF Considerations This is a registered security

dd th i d i t t t li di t add as authorized investment to your policy as direct or sweep Safety is that you own and not have pledged securities

Get and read the prospectus Check historical rates Check the expense fee Choose the type that fits you risk tolerance

It may add value to go directly to fund Usually will under-perform pools because of expenses/subsidy

Know the procedures

The Ubiquitous RepoThe Ubiquitous RepoR h A Repurchase Agreements

Simultaneous “Buy-Sell” Transactions BUY

Allows full liquidity at market rates Uses DVP and independent custody Margins (102%) monitored constantly

SELLg ( ) y

Various types include overnight, open & term

“Fle ” i de igned fo pit l p oje t “Flex” is designed for capital projects Established for the entire expenditure period Rate is fixed and normally above issue rate Flexibility on draws with xx/month Interest on semi-annual basis

T iT i Pa t Repo T ansactionsPa t Repo T ansactionsTriTri--Party Repo TransactionsParty Repo Transactions

Public Entity

with $$$

Primary dealer with securitiesAgreement to buy-sell

$ Instructions

Thi d P t NYC B k

$ Instructions

Third Party NYC Bank

$$Cash Securities

Securities

Account Account

Safeg a ds fo T e ReposSafeg a ds fo T e ReposSafeguards for True ReposSafeguards for True Repos

Primary dealers only Banks are allowed under law but not competitive

Written Master Repurchase Agreement Written Master Repurchase Agreement The Bond Market Association Master Repo Agreement

Independent Safekeepingb k ll Money center bank usually

DVP at all times! Mark-to-market daily Collateral Margins (102%) Designated Collateral

Dange Repo BankDange Repo Bank S eepsDanger: Repo Bank Danger: Repo Bank Sweeps

FDIC has no set procedure for liquidation

Losses have occurred Ownership is not clear Securities are segregated in bank’s name Securities remain in bank’s safekeeping account

Rates are slightly higher for a reason

Sp ead Mone Ma ket Acco ntsSp ead Mone Ma ket Acco ntsSpread Money Market AccountsSpread Money Market AccountsThrough a BANK Through a BROKERThrough a BANK Through a BROKER

B d Li idit S itiB d Li idit S itiBeyond Liquidity: SecuritiesBeyond Liquidity: Securities

Securities

Provide stability in rate

Liquidity Options

Float and lag rates both up andychanges

May add yield May not be liquid

Float, and lag, rates both up and down

Always provide short rateAssure liquidity

Needed by all but smallest entities

Assure liquidity

Needed by all entities

In estments ChoicesIn estments ChoicesInvestments ChoicesInvestments Choices

US Treasuries US Agencies/ Commercial Paper

Repurchase Agreements Money Market Mutual Funds Mutual FundsCo e c a ape

corporations, ABS Bankers Acceptances

Certificates of Deposit

utua u ds GICs Investment Pools

State of Israel bonds Certificates of Deposit Brokered CD Securities

State of Israel bonds Municipal Obligations [Letters of Credit]

Best Choices for Best Choices for Infrequent InvestorsInfrequent Investors

S i US Treasuries Treasury Bills and Notes Primarily discount securities

US Agencies/Instrumentalities FHLB, FNMA, FHLMC, FFCB Primarily discount structure Primarily discount structure

Certificates of Deposit FDIC and collateralized Depositoryp y FDIC Brokered (with controls)

Money Market Mutual FundsL l G t I t t P l Local Government Investment Pools

Other alternatives for today’s special situation

The Name is BOND…The Name is BOND…The Name is BOND…The Name is BOND…

Securities: Yield enhancement

possibilitiespossibilities Liquidity restrictions Must reflect cash flow

Never invest beyond needs Never invest beyond needs Provide for diversification Understand the accounting Minimize risk by limiting

choices

DEPOSITORYDEPOSITORYCertificates of DepositCertificates of Deposit

Depository agreements Bank relationship Any bank now allowed but primarily Texas Any bank now allowed but primarily Texas Requires paperwork to create a deposit

Patriot (Terrorist) Act provisionsF d l ft i th b k d it Funds are left in the bank as a deposit

All MUST BE Insured by FDIC or collateralizedy Above $250,000 requires agreement and collateral Texas collateral rules protect you under PFCA

Different collateral types are legal Different collateral types are legal Controlled by PFIA and depository law (Local Gov’t Code Ch.105)

PFIA Language re CDPFIA Language re CDPFIA Language re CDPFIA Language re CD2256.010

( ) T CD CU Sh C tifi t (a) Texas CD or CU Share Certificate Insured by FDIC or Nat’l CU Share Insurance Collateralized per PFCA including authorized mortgage backed

securities in PFIA Secured in any manner allowed by law

(b) Brokered CD Invest through Texas bank or Texas broker (on broker list) Fully insured by US or its instrumentality Fully insured by US or its instrumentality Includes CDARS spread program Limited to $250,000 per bank Broker can custody ---conflict with DVP

CD Conf sionCD Conf sionCD ConfusionCD Confusion

Depository CD

Relationship with bank

Brokered CD

A registered security Relationship with bank Paperwork involved Can exceed $250,000

ll l $

A registered security Straight buy/sell Can not exceed $250,000

ll l ll d Collateralize > $250,000 Only TEXAS Not on broker list

No collateral allowed Any state Can be spread (CDARS)

MERGER PROTECTION

On broker list

NO MERGER MERGER PROTECTION NO MERGER PROTECTION

Brokered CDs Brokered CDs (Added 2011)(Added 2011)

Differentiate “Brokered” CD as securities in policy “Brokered certificate of deposit securities” Brokered certificate of deposit securities

Often sold by brokers or banks Legal in Texas -------but only if FDIC insured

A Pool ?? Or??A Pool ?? Or??What does your policy say??What does your policy say??

These are brokered CDs bought by a pool, not in City’s name and not in their policy.

Policy Language Authorizing Policy Language Authorizing y g g gy g g gDepositoryDepository CDsCDs

Fully insured or collateralized depository certificates of deposit of banks doing business in Texas, with a maximum maturity of years guaranteed or insuredmaximum maturity of ----- years guaranteed or insured by the Federal Deposit Insurance Corporation, or its successor, or collateralized in accordance with this Policy.

Collateralized CD will be created under a written Collateralized CD will be created under a written collateral agreement.

Policy Language AuthorizingPolicy Language Authorizingy g g gy g g gBrokered CDsBrokered CDs

FDIC insured brokered certificate of deposit securitiesfrom banks in any US state,

d li d t t th Cit ’ f k i delivered versus payment to the City’s safekeeping depository,

not to exceed one year to maturity. not to exceed one year to maturity.

Before purchase the Investment Office must verify that the bank is FDIC insured on www.fdic.gov

Cont ols on B oke ed CDCont ols on B oke ed CDControls on Brokered CDControls on Brokered CD

The investment officer must monitor On no less than a weekly basis Status and ownership of the issuing bank

based on FDIC information

If the bank has merged or been acquiredwhere other deposits exist Investment Officer shall immediately liquidate

b k d CD hi h l th it bany brokered CD which places the city above the FDIC insurance coverage

CD Acc al and Pa mentsCD Acc al and Pa mentsCD Accrual and PaymentsCD Accrual and Payments You purchase a CD: You purchase a CD:

Par $ 500,000.00 Principal $ 500,000.00

Interest rate 1 50 % Interest rate 1.50 % Days-to-Maturity 180

Total Earnings = $ 3,750.00 Earning each day = $ 20.83 per day

($500,000 x 1.50%) / 360 x 180($ , ) /

Earnings are from accrued interest only Earnings belong on your monthly/quarterly reportsg g y y/q y p Payments will differ (monthly, quarterly, at maturity) Check it!

B ing an FDIC CDB ing an FDIC CDBuying an FDIC CDBuying an FDIC CD FDIC coverage is permanent at $ 250,000

Decide on your needed maturity date

Phone several banks in Texas for the rate competition Phone several banks in Texas for the rate competition Ask for the maturity ranges (3 mo, 6 mo, 1 year) and compare Get all in APY (annual percentage yield) Clarify dates agreement and certification requirements Clarify dates, agreement and certification requirements

Do not use a broker to place a depository CD

Chose the best rate and notify the banks Get instructions to send money Send money on settlement date

B ing A Collate ali ed CDB ing A Collate ali ed CDBuying A Collateralized CDBuying A Collateralized CD

Decide on your needed maturity

You will need a collateral agreement You will need a collateral agreement Agree on terms and collateral needs Clarify certification

Phone several banks for the rates Get all in APY (annual percentage yield)

Chose the best rate and notify the banks Get instructions to send money Get instructions to send money Send money on settlement date

B ing a CDARS CDB ing a CDARS CDBuying a CDARS CDBuying a CDARS CD

Check for CDARS banks in Texas (CDARS.com) Currently up to $50 million at $10mm per week

Maturities set at 3 6 and 12 months normally Maturities set at 3,6, and 12 months normally They all settle on Thursdays

Phone or email several banks for the rates Get all in APY (annual percentage yield) Certification only from entrance bank

Chose the best rate and notify the banks Chose the best rate and notify the banks Get instructions to send money and agreement for CDARS

Standard CDARS Deposit Placement Agreement Send money on settlement date

Certificate of Deposit Certificate of Deposit Ce ca e o eposCe ca e o eposAccount Registry ServiceAccount Registry Service

CDARS Banks in Te asCDARS Banks in Te asCDARS Banks in TexasCDARS Banks in Texas

Othe CD OptionsOthe CD OptionsOther CD OptionsOther CD Options

Virtual Banks doing business in Texas State Farm Insurance State Farm Insurance Ally Bank USAA USAA Others?

Stay under FDIC insurance levelsMust make investment directly Must make investment directly

Check the RatesCheck the RatesCheck the RatesCheck the Rates

Current rates survey: Ally MMA 0.84%

All 1 CD 0 85% Ally 1-year CD 0.85% State Farm MMA 0.65% State Farm 1 –year CD 0.36%

St t F 9 th CD 0 95% State Farm 9 month CD 0.95% BBVA 1-year 0.50%

Possible for 4a-4b corporations? Rates change normally on Tuesdays – all banks

R d Y C ll t l C tR d Y C ll t l C tReduce Your Collateral Cost Reduce Your Collateral Cost Collateral is expensive for banks – and you!

Additional FDIC assessments increase costsd d d d On time and demand deposits

10% to 15% possible

Certificate of Deposit Account Registry Service (CDARS) could reduce collateral on time deposits

Manage your collateral and balances Monitor the alternative rates – stay on top of them Monitor the alternative rates stay on top of them

CDARS: An Edge for Small Banks CDARS: An Edge for Small Banks C S dge o S a a sC S dge o S a a s

No fee to customers CD rates are negotiated as normal Banks must be members

Promontory Inter-financial Network (700 banks)

Initial test transactions are used City receives consolidated report City receives consolidated report

Reciprocal or non-reciprocalp p

S l CDARS CDS l CDARS CDSample CDARS CDSample CDARS CD

000088888 Account ID 1000088888 Product Name 52 week CD Interest Rate 2.350 %

Account Balances $ 195 000 Account Balances $ 195,000 Effective Date 01/15/04 Maturity Date 01/14/05 YTD Interest accrued $ 2 291 25 YTD Interest accrued $ 2,291.25 Average Annual & Earned: 2.377 %

CD Issued by Bank X Balances and interest paid/accrued $ …………….

CD Issued by Bank Y$ Balances and interest paid/accrued $ …………….

Sec it BasicsSec it BasicsSecurity BasicsSecurity Basics

Buying Securities At a discount At par At a premium

Reporting Securities Amortized value Book value

M k t l Market value

The Money MarketsThe Money Markets

Loose collection of markets Creativity and innovation Structural variety requires knowledge y q g

(embedded options, calls, strips, bullets, etc.) Book entry requires documentation DVP settlement is critical

T o T pes of Sec itiesT o T pes of Sec itiesTwo Types of SecuritiesTwo Types of Securities You earn only from principal or interest

Money market = created only 1 year or less Here you earn solely from accretion of principal

US Government > T-Bills US Agencies > Discount Notes Local Government > BANs, TRANs Corporations > Commercial Paper

Fixed income = created only 1 year or more Her you can earn from principal and interest

US Government > Treasury Notes/Bond US Agencies > Agency Notes Local Government > Long-term Bonds Corporations > Corporate Notes

A Wo d on Sec it Ea ningA Wo d on Sec it Ea ningA Word on Security EarningA Word on Security Earning

Earning come from only:

Principal The value of the principal increases

Interest A coupon accrued then pays on a schedule

h f d/ l Rate accrues then pays on a fund/pool

Bought above par – moves to par

Amount above par is amortized – “expensed”PremiumPremium

Expense

100(par)

Bought below par – moves to parDiscount

Income

Amount below par is accreted – “earns”

Issuance Maturity

A Wo d on Sec it P iceA Wo d on Sec it P iceA Word on Security PriceA Word on Security Price

PAR means $100 or $1=$1 Buying at par means you pay the face value

DISCOUNT means below PAR Buying a discount means you pay less than face

PREMIUM means above PAR Buying at premium means you pay more than face

Disco nt St ct esDisco nt St ct esDiscount StructuresDiscount Structures All securities with original maturities < 1 year

Treasury bills Agency discount notes Commercial paper Commercial paper

Quoted at a discountOft l t i ld Often close to yield

Ask to be quoted yield for comparison purposes

Discount Securities Discount Securities A t (G i ) V l O LifA t (G i ) V l O LifAccrete (Gain) Value Over LifeAccrete (Gain) Value Over Life

Always bought at a price less than 100

Earn daily and only through 99 5

100

What Earn daily and only through accretion

Buying a $100,000 T-Note 98 5

99

99.5 What You Earn

Price = $ 98,000 You own it 200 days until

maturityDiscount/# of days 97 5

98

98.5

Discount/# of days 2,000/200 days= $ 10 / day 97

97.5

Purchase Maturity

You buy it at $ 98,000

it matures at $ 100,000

B ing at a “Disco nt”B ing at a “Disco nt”Buying at a “Discount” Buying at a “Discount” 101

Discount notes All securities under one

year at issue or auction 99100101

year at issue or auction T-Bills, CP, Discount notes

Notes at a discount 969798

Accretion

E

A

R

Notes at a discount Securities bought below face Book value increases daily in

a straight line949596 Accretion N

a straight line

Earnings are difference di t t P (f )

9293

Purchase Maturitydiscount to Par (face) y

Dail Acc etionDail Acc etionDaily AccretionDaily Accretion

You purchased a T-Bill 8/6/12 about 0.11% yield:

Par $1 000 000 00 Par $1,000,000.00 Principal $ 997,695.69 (book value day 1)

Discount $ 2,304.40 Days-to-Maturity 356

Daily Accretion $ 6.47 (2,304.40/356)

Ouch !

Earnings only from accretion

Discount vs. PriceDiscount vs. Price

Discount securities are often quoted as a discount Shorthand mechanism for price

Larger the discount = lower the price Know the convention but buy on yield Ask the broker to quote the yield for comparisons

T-Bill A 1 95 discount 99 5016667 price T Bill A 1.95 discount 99.5016667 price T-Bill B 1.65 discount 99.5783333 price

Disco nt Sec itiesDisco nt Sec itiesDiscount SecuritiesDiscount Securities

Agency discount notes always sold below par Quoted at a discount not a price

O l t k l t t k Only two key elements to know

Discount Listing

Maturity Mat Bid Asked Chg Ask YldDec 16 ‘xx 165 0.68 0.66 -0.03 0.75

Sec it “Notes”Sec it “Notes”Security “Notes”Security “Notes”Any security is longer than one year when issued or Any security is longer than one year when issued or auctioned is a note Notes move to maturity over time An old 30 year could now be a 1 year note

All notes have a coupon which is ‘fixed’ at issuance * All notes have a coupon which is fixed at issuance *With a few exceptions The rate is based on the then current rates

The coupon earns = accrues interest

The principal can earn or can be an expense

Notes Bo ghtNotes Bo ght at a P emi mat a P emi mNotes Bought Notes Bought at a Premiumat a Premium

Buying above par ($1=$1)101.5

102e x

Daily amortization is an expense

100.5

101

x p e n

Premium of $20,000 for 180 days

= $111 11/day 99 5

100

100.5Amortization s

e

= $111.11/day

99

99.5

Purchase Maturity

Disco nt o P emi m?Disco nt o P emi m?Discount or Premium?Discount or Premium?

T-Note 5% Note - yield of 3.22% A premium or discount ?

T-Note 5% Note - yield of 6.75% A premium or discount ?

US T eas ObligationsUS T eas ObligationsUS Treasury ObligationsUS Treasury Obligations

Various types T-Bills, T-Notes, TIPS, Strips Securities are auctioned regularly Securities are auctioned regularly If you buy at auction then get auction yield Securities then move to the secondary market

Explicit guarantee Based on taxing ability of the US

The ‘certainty’ security Strict guidelines control the auctions and forms Strict guidelines control the auctions and forms

T eas BillsT eas BillsTreasury BillsTreasury Bills

Markets hate uncertainty so it loves its certainty and stability Auctions are scheduled with $$ announced

Maturities of 1 year or less No coupon Trade at discount to par 3- & 6-month auctioned every Monday* 4-week auctioned every Tuesday* Settlement & maturities on Thursdays*y

Cash Management Bills – one month

*Unless a holiday, then next business day

Buying A Treasury BillBuying A Treasury Bill

$100,000 T-Bill maturing 5/27/XX Settling 6/5/xx at 1.11 Discount

The discount price translates into a discount from par

Par $ 100,000.00 Price 94 83322 Price 94.83322 Principal $ 94,833.22 Discount $ 5,166.78$ , Yield 1.38 %

NotesNotesNotesNotes

Notes are created starting at 2 years

Notes carry a coupon The coupon is normally ‘fixed’

A f iti h h d l A few securities coupons change on schedules A coupon accrues for the owner as long as owned When you buy a note you also buy the accrued interestWhen you buy a note you also buy the accrued interest

Notes can be bought at/above/below parg / / p

US T eas NotesUS T eas NotesUS Treasury NotesUS Treasury Notes

The NO-SURPRISES security

Semi-annual fixed coupons fixed at time of issuance (auction)

Mature on the 15th or last day of month Mature on the 15th or last day of month “Currents” (on-the-runs)= most recently auctioned Interest is actual days/actual days of year basisa ua day /a ua day o y a ba Price quoted as % of par (99,100,101) Usually quoted as YTM

A note will have coupon accrual during its life in

Note

Addition to possible accretion and amortization.

Note bought at Premium

Coupon coupon coupon coupon

100(par)

p p p p

N tNote bought at Discount

Issuance Maturity

B ing a T eas NoteB ing a T eas NoteBuying a Treasury NoteBuying a Treasury Note

Semi-annual coupons Sold at par, discount or premium Price is percent of face Quoted in 32nds Still only two things to attend to: maturity and yield

T-Note Listing

Rate Maturity Bid Asked Chg Ask Yld1 3/4 Aug xx 97:26 97:28 -3 1.41

St ipsSt ipsStripsStrips

Only Treasury strips are authorized by PFIA

All h b t i d All coupons have been stripped away Only the principal is purchased No payment until maturityp y y Straight line accretion

Creates a long term discount note Creates a long-term discount note Good for targeting specific dates in future Usually start at 5-10 year maturities

Othe T eas St ct esOthe T eas St ct esOther Treasury StructuresOther Treasury Structures

Callables Treasury has a right to call them

Strips (US Government securities) Separate Trading of Registered Interest& Principal zero coupon, wireable, like a long T-Billp , , g

TIPS (a NEGATIVE yield TIPS in 10/10!!) inflation adjusted j

Treasury Directywww.treasurydirect.gov

Changed in November 2012

No longer available to governmental titi t F d l ientities – except Federal agencies

Available for ‘corporate entities’ only Unsure as yet whether this applies to EDCy pp

Where to find the Treasuries:Where to find the Treasuries:On the Yield CurveOn the Yield Curve

7A ‘normal’ yield curve

66

53 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr

T-Bills T-Notes T-Bond

T eas Rates Abo ndT eas Rates Abo ndTreasury Rates AboundTreasury Rates Abound

Prices and YieldsPrices and YieldsMove InverselyMove Inversely

% $

A 5% coupon at par (100)p p ( )

Coupon = 5% Yield = 5%

Prices and YieldsPrices and Yields

If Rates Go UPIf Rates Go UPIf Rates Go UPIf Rates Go UP

%

$

A 5% coupon is not worth as much if rates go up so price goes downA 5% coupon is not worth as much if rates go up so price goes down

Coupon = 5 % Yield = 6 %

Prices and YieldsPrices and Yields

If Rates Go DOWNIf Rates Go DOWNIf Rates Go DOWNIf Rates Go DOWN

$

%

A 5% coupon is worth more if rates go down so price goes upA 5% coupon is worth more if rates go down so price goes up

Coupon = 5 % Yield = 4 %

US AgenciesUS AgenciesUS AgenciesUS Agencies

Short term agencies Called ‘discount notes’ Some are regularly ‘issued’ and some as needed Non-standard dates created to fill investor needs

Longer term agenciesC ll d ‘d b t ’ i Called ‘debentures’ or agencies

Some are set maturities – many are not Different structures created to fit investor or market Different structures created to fit investor or market

US AgenciesUS AgenciesUS AgenciesUS AgenciesThe investor’s advantage in lower credit

Treasuries give markets standardization

Agencies offer more to get your business

Advantages All ‘good day’ maturities Flexible maturity date choices Flexible maturity date choices Flexible structures More yield to take ‘risk’ of lower credit

Fede al AgenciesFede al AgenciesFederal AgenciesFederal Agencies

Agencies most often in the marketplace

FHLB Federal Home Loan Bank

FHLMC in “conservatorship”FHLMC in conservatorship “Freddie Mac” Home Loan Mortgage Corp

FFCB FFCB “Farm Credit” Farm Credit Bank

FNMA in “conservatorship” FNMA in conservatorship “Fannie Mae” National Mortgage Assoc.

Go e nment AgenciesGo e nment AgenciesGovernment Agencies Government Agencies

Non-standard, semi-annual coupons Varying middle dates

i iAgency Listing

Rate Maturity Bid Asked Yield

0.75 4-xx 92:20 92:24 1.88

Callable SecuritiesCallable SecuritiesCallable SecuritiesCallable Securities Issuers

A i ti bli titi Agencies, corporations, public entities

Callable is two securities1. Issuer sells fixed income security to investor

Value = present value of stream of cash flows2 Investor sells option to call to issuer2. Investor sells option to call to issuer

Value = probability of being exercised based upon current yield curve, a rate of volatility, and time to exercise date

Lock-out period Call protection; initial period during which issuer can’t call bonds

Callable StructuresCallable StructuresCallable StructuresCallable Structures Various structures – 3/1; 5/2; 10/3 “2YNC6 Berm”

European – one-time call European one time call Bermuda – “Discrete call”, callable only on interest payment

dates American – “Continuous call” callable anytime with specified # American Continuous call , callable anytime with specified #

of days notice

Step up callables Step-up callables Fixed coupon to next call date At call date, bonds either called or coupon “steps

”/i d hi hup”/increases to structured higher coupon Can have multi-step ups Not the same as floating rate notes

Valuation of Callable SecuritiesValuation of Callable SecuritiesValuation of Callable SecuritiesValuation of Callable Securities

Priced at spread to Treasuries

Yield to Worst (YTW) Yield to Worst (YTW) Which is lesser: Yield to Maturity or Yield to Call

Option Adjusted Spread (OAS) Option Adjusted Spread (OAS) Creates synthetic “bullet” Compare spread from OAS analysis to historical spread for non-

callable securities from same market sector

Structured or Structured or FloatingFloating--Rate NotesRate Notes

“Floaters” reset rates periodically

Index Index

Spreads

Reset Periods Reset Periods

Day Count Periods

Payment Periods

Maturity

Valuation difficulties (accounting variations)

Agencies Come in 2 Va ietiesAgencies Come in 2 Varieties

Agencies issue debentures to get funds to buy mortgages

Agency Notes Agency Notes debentures of the agency backed by the credit of the agency Issued like regular discount notes and notes Issued like regular discount notes and notes

Mortgage Backed AgenciesC t d b l f d b k d b h t Created by pools of and backed by home mortgages

affected by interest rates and mortgage pay-downs

Some Mo e Sec itiesSome Mo e Sec itiesSome More SecuritiesSome More Securities

Additional types of securities Not used by most public entities Not used by most public entities

They are legal if in your policy They are legal if in your policy You might want specificity in definitions

Chose your policy securities carefullyy p y y

Bond M t al F ndsBond M t al F ndsBond Mutual FundsBond Mutual Funds Structure is key – not liquid securities

Moves on market prices – not a straight accrual Must have a maximum WAM of 2 years Not permitted for bond funds because of risk

Not much reason to use especially now Not much reason to use – especially now Potential of principal loss in rising rates

Check the fee Check the fee Use no-load funds total expense ratio

Know the earnings history

Read the prospectus Size Goals and policy restraints

Bond F ndsBond F ndsBond FundsBond Funds

Must be treasury and agency Bond Proceeds are prohibited by law!! Too much risk of principal loss. Maximum WAM of 2 years

What would that make the maximum maturity??y

Short term bond mutual funds Only safe when rates are falling Rising rates may limit your liquidity or lose principalg y y q y p p

Look for Morningstar Four Stars **** Watch for rates to turn Watch for rates to turn Watch and check for liquidity terms Reporting will be different Restrict the amount used – primarily for reserves

Co po ate BondsCo po ate BondsCorporate BondsCorporate Bonds

Only for Higher Education and ISD >50,000,

Credit required AA but higher may be Credit required AA- but higher may be safer

Monitoring required

Mo tgage Backed Sec itiesMo tgage Backed Sec itiesMortgage Backed SecuritiesMortgage Backed Securities

Built from pools of home mortgages “Pass-through” securities Passes through P&I from homeowner

Stated mat it and e pected mat it Stated maturity and expected maturity

Performance of pool Performance of pool dependent on mortgage payments Dependent upon interest ratesp p

Subjective pricing

Basic Mortgage Backed Security Basic Mortgage Backed Security g g yg g y(‘MBS’)(‘MBS’)

Homeowner gets Company sells Agency pools

Mortgage the mortgage like mortgagesMortgage the mortgage like mortgages

As homeowner pays P&I p ymonthly Payments flow

through agency investor

to investorto investor

It all hinges on the homeowner.

De i ati e Mo tgage BackedDe i ati e Mo tgage BackedDerivative Mortgage BackedDerivative Mortgage Backed

Created for investors clamoring for yield

Pool of mortgages is divided Collateralized Mortgage Obligations (CMO)g g g Each piece (tranche) is structured differently

CMO differ in risk TAC, PAC, Jump-Z, Inverses

CMOCMOCMOCMO

Collateralized mortgage obligations Noble laureates puzzle over some of this math

Pools of mortgages split into pieces

Each piece is structured differentlySome carry more risk (and therefore yield) Some carry more risk (and therefore yield)

Certain CMO are unauthorized in TX Certain CMO are unauthorized in TX

M nicipal ObligationsM nicipal ObligationsMunicipal ObligationsMunicipal Obligations

Current value over other securities

Taxable and non-taxable issuers In any US state Rated A or above (you may want higher!)

Various structures Various structures

Credit and liquidity issues

Arbitrage safe haven

Comme cial PapeComme cial PapeCommercial PaperCommercial Paper

Unsecured promissory note of a corporation Corporation is borrowing short term funds Using the low rates of the short term market Often used by municipalities then rolled to longer term debtOften used by municipalities then rolled to longer term debt

Credit Considerations Dual rating is better market-wise Law allows single rating with LOC Law allows single rating with LOC

Cautions: Stay to known names Consider the situation (like European bank debt!) Consider the situation (like European bank debt!) Stay short and high quality Available out 270 days Stay within 90 days – set your policy as such

Sample CP Polic Lang ageSample CP Polic Lang ageSample CP Policy LanguageSample CP Policy Language

Commercial paper rated A1/P1 or equivalent by two nationally recognized q y y grating agencies with a maturity not longer than 90 days.y

Could stipulate domestic CP only Could stipulate domestic CP only

Asset Backed Comme cial PapeAsset Backed Comme cial PapeAsset Backed Commercial PaperAsset Backed Commercial Paper

Know what backed the securities

Based on underlying securities or assets Not based on credit of the company

Originally backed by receivables Short-term debt used to finance long term risk

High concentrations threaten funds/pools Florida, Montana, Washington State

Bankers AcceptancesBankers Acceptances Bankers Acceptances

International trade primarily Defined as 270 maximum

Restrict to 90-120 days in policy Illiquid Measure spread vs CP Credit issues Foreign versus domestic?

Is aeli BondsIs aeli BondsIsraeli BondsIsraeli Bonds

Issued, assumed or guaranteed by the State of Israely Assumed backing by US Currently 1.20% on 2-year

Denominated in US dollars Longer term Illiquid Illiquid

LimitedLimited Use Sec itiesUse Sec itiesLimitedLimited--Use SecuritiesUse Securities GIC

Guaranteed Investment Contracts Guaranteed Investment Contracts Basically insurance contracts

Specialized funds [IRS Code Sec 501(f)] Specialized funds [IRS Code Sec 501(f)] Institutions of Higher Education

Municipal utilities Distributing electricity or natural gas Hedging contracts Decommissioning Trust Fund

Mineral Rights Funds Alternate uses for mineral right (gas) funds Barnett Shale impetus Barnett Shale impetus

Sec ities LendingSec ities LendingSecurities LendingSecurities Lending

Authorized after 9/1/03

Reverse repo without buy/sell

Larger portfolio use

primarily: Reverse repo without buy/sell

Banks and some primariesmust have

securities to lend

50% of income to entity (10-15 bps)

secu t es to e d

Requires a strategy

Collateralized

Treasuries (primarily) and agencies only Treasuries (primarily) and agencies only

Sec ities LendingSec ities LendingSecurities LendingSecurities Lending Must be at least 100% collateralized with Must be at least 100% collateralized with

treasuries, agencies and munis letters of credit from bank rated not less than A

commercial paper mutual funds or pools commercial paper, mutual funds, or pools

Must allow for termination at any time Collateral must be

pledged to public entity and held in its name deposited at time of the loandeposited at time of the loan

Loan must be with primary or bank in Texas Contract may not be for term longer than 1 year

Can extend Can extend

Special Use PFIA Sec itiesSpecial Use PFIA Sec itiesSpecial Use PFIA SecuritiesSpecial Use PFIA Securities

Guaranteed Investment Contracts (GICs) Primarily housing authorities

D t il d t i ti & ll t l Detailed restrictions on use & collateral

Nuclear De-commissioning fundsNuclear De commissioning funds Long life requires differentiation

Higher Education variations Corporate notes, equities, stock mutual funds

NOT f h l di t i t NOT for school districts

Sec ities in Gene alSec ities in Gene alSecurities in GeneralSecurities in General Current Issues Current Issues Round lot purchases may be better prices Odd lot purchases to buy and hold

Watch for credit warnings and esoteric structures

When it sounds too good to be true…..

BUT… When in Doubt - Don’t!

St ateg E e cisesSt ateg E e cisesStrategy ExercisesStrategy Exercises

Three case studies

See handouts

P tf li R tiP tf li R tiPortfolio ReportingPortfolio Reporting To show risk To show risk

Volatility risk (change in market value)

To provide accounting/archiving To provide accounting/archiving Detail for holdings and summary for information

To illustrate compliance To illustrate compliance Compliance with policy parameters (SLDY)

To j d e e fo e To judge performance Yield Benchmark comparison

A ti d R ti C tA ti d R ti C tAccounting and Reporting ConceptsAccounting and Reporting Concepts

Two types of securities Discount securities Fixed income securities (with a coupon)( p )

Two values Market value = price of you sell it – changes dailyMarket value price of you sell it changes daily Book value = your value net of amortization – changes daily

Three computations Three computations Interest accrual (coupons) Accretion (earnings) Amortization (expense) Amortization (expense)

What Did I Ea n?What Did I Ea n?What Did I Earn?What Did I Earn?

Earnings = accrual plus (net amortization + accrued)

Amortization from notes bought above par decreases earnings

Accretion from notes bought below par increases earnings

ISD Ea nings pe St dentISD Ea nings pe St dentISD Earnings per StudentISD Earnings per Student

ISDs are being held to earning the equivalent of the 3-month Treasury Bill

What does this mean? Most years this will allow for pool use Most years this will allow for pool use

With low rates add in ECR earning and bank earnings

FY 2011-2012 3-month yielded 0.054% Pools yielded 0.09%oo s y e ded 0 09%

A.

Bank IBA 0.05% 20,000,000 $ 833.

0.05% $ 833.

BB.

Pool #1 0.15% 10,000,000 $ 1,250.

Pool #2 0.22% 10,000,000 $ 1,666.Pool #2 0.22% 10,000,000 $ 1,666.

0.185% $ 2,916.

C.

Pool #1 0.15% 3,000,000 $ 375.

Pool #2 0.22% 10,000,000 $ 1,666.

ECR 0.40% 7,000,000 $ 2,333.

0.273% $ 4,374.

Earnings go to Income not Interest Received. Recognize it!

A ti f th P tf liA ti f th P tf liAccounting for the PortfolioAccounting for the Portfolio

Buying securities At par = $1 for $1 face (price of 100) at par Below par = below $1 or 100 at a discount Above par = above $1 or 100 at a premium All affect the principal only

f Accounting for securities The book value at maturity must equal face value (100) Straight line amortization/accretion

Earnings from securities are from: Earning from the changes in principal (premium/discount) Earning from interest accrued in a coupon (accrued interest)

Book Val eBook Val eBook ValueBook Value

Changes daily 100

Bought at par Purchase

Point

Bought at discount Purchase Point

Bought at a premium100

Book value moves from start to 100 regardless of price.

Ma ket Val e Changes DailMa ket Val e Changes DailMarket Value Changes DailyMarket Value Changes Daily

Market value is quoted as principal only

Market value equals: Market value equals: Current price x face value 101.22 x $100,000 = $101,220 98.3 x $100,000 = $ 98,300

Certificates of Deposit p always priced at 100 Market will always equal face amount 100 x $100,000 = $100,000$ , $ ,

P icingP icingPricingPricing

Require an independent source

Gains and Losses Gains and Losses realized and unrealized

d b k Structured securities can be tricky Calls, step-ups, floaters, indexed, TIPS, pools

Mortgage backed securities need more particularly subjective/judgmental pricing Prepayment speed assumptions, PSA rates

Small issue pricing Small issue pricing comparables

Ea ningsEa ningsEarningsEarnings

Earnings = amortization + accrued

Note – bought at a premium1. Monthly amortization = daily amort. * # days plus2. Coupon earnings = coupon rate * face/12

Note – bought at a discount1. Monthly accretion = daily accretion * # days plus2. Coupon earnings = coupon rate * face/12

What did I ea n?What did I ea n?What did I earn?What did I earn?

Income equals:

Total Accrued + Net AmortizationTotal Accrued + Net Amortization

Investment Earnings recognizes coupon flow (accrued) recognizes original price of security (principal) recognizes original price of security (principal)

Accrual basis does not include cash coupons

Co pons on a TCo pons on a T NoteNoteCoupons on a TCoupons on a T--NoteNote

$600

$800

$1,000

$0

$200

$400

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Coupons on May 15th – when is the next coupon? How much did we earn in May?How much did we earn in May? If it matures next August how much will we earn in that

month?

Repo ting Iss esRepo ting Iss esReporting IssuesReporting Issues

Accuracy Timeliness Compliance Risk Identification

P icing Pricing Value Representation Formats Formats

Information

A Ca dinal Repo ting R leA Ca dinal Repo ting R leA Cardinal Reporting RuleA Cardinal Reporting Rule Weighting the Information Weighting the Information

Recognizes the impact of Dollar value Maturity Yield

$ 10,000 CD 100 days$ 500 000 CD 10 days 12 d WAM $ 500,000 CD 10 days = 12 day WAM

W i ht d A M t itW i ht d A M t itWeighted Average MaturityWeighted Average Maturity

This measure is useful in determining the degree of market or interest rate risk.

The longer the WAM, the more exposure to the market and more potential for capital gains and loses. More risk.

Portfolio managers typically shorten or lengthen average maturities depending on their interest rate outlookmaturities depending on their interest rate outlook. If rates are expected to drop we ------- ? If rates are expected to rise we -------- ?

C l l ti W i ht d A M t itC l l ti W i ht d A M t itCalculating Weighted Average MaturityCalculating Weighted Average MaturityMultiply book value by days remaining to maturity

Divide Sum by total book value of portfolio

Current Book Value

Remaining Days to Maturity

Book x Days

6,568,777 14 91,962,878

3,211,222 48 154,138,656

5,999,158 300 1,799,747,400

1,425,177 540 769,595,580

1,920,575 270 518,555,250

19,124,909 3,333,999,764

3,333,999,764/19,124,909 174.3 daysEquals WAM =

W i ht d A Yi ldW i ht d A Yi ldWeighted Average YieldWeighted Average Yield

The weighted average yield will accurately describe the performance of a buy-and-hold portfolio. o a buy a d o d po t o o

Weighted yield is a measure against your benchmark.

This measure does not consider market value impact. This measure reflects the price at which you bought the securities.

C l l ti W i ht d A Yi ldC l l ti W i ht d A Yi ldCalculating Weighted Average YieldCalculating Weighted Average Yield

Multiply book value by purchase yieldDivide Sum by total book value of portfolio

Book Value Purchase Yield Book x Yield

6,568,777 2.25 147,797

3 211 222 2 10 67 4353,211,222 2.10 67,435

5,999,158 1.99 119,383

1,425,177 2.75 39,192

1 920 575 3 20 61 4581,920,575 3.20 61,458

19,124,909 435,265

435,265 / 19,124,909 Equals WAY =

2.27 %Equals WAY =

To Commingle or Not to …..To Commingle or Not to …..ggInterest DistributionInterest Distribution

How to effectively distribute interest to various funds Replaces separate portfoliosp p p May help your overall yield Distributed on a pro rata basis by percent of fund

AccuracyE Ease

Timeliness

Dist ib ting Inte estDist ib ting Inte estDistributing InterestDistributing Interest Total interest to be distributed = $10,000$ ,

Fund/ Avg* % of InterestProject Bal Total Receivedoj a o a d

Fund A $ 150,000 50.49 % $ 5,049.00Fund B $ 40,000 13.40 % $ 1,340.00Fund C $ 101,500 34.43 % $ 3,443.00Fund D $ 5,000 1.68 % $ 168.00

$ 296 500 $10 000 00$ 296,500 $10,000.00

*Use either month-end balance or average balance*Use either month-end balance or average balance

Specific Repo t Req i ementsSpecific Repo t Req i ementsSpecific Report RequirementsSpecific Report Requirements

Compliance statement and signature “Report was prepared in compliance with the Act and our policy”

Detail Information Each investment position (including bank accounts) with

maturity datematurity date Book and market values of each position at end of period Portfolio/fund investment belongs to

Summary Information Beginning and ending market value of portfoliog g g p Earnings for the period Market sector summaries

Repo t Mi o Polic Pa amete sRepo t Mi o Polic Pa amete sReport Mirror Policy Parameters Report Mirror Policy Parameters Key report parameters reflect your policy Key report parameters reflect your policy

Maximum maturity limitations Maximum average maturity limitationsg y Diversification goals and limits Performance benchmarks Philosophy (Strategy) on the portfolio Volatility (change in market value)

not required by PFIA as of 2011 not required by PFIA as of 2011

Reports should reflect risk tolerances Reports should reflect risk tolerances

Looking in Repo ts fo RiskLooking in Repo ts fo RiskLooking in Reports for RiskLooking in Reports for Risk

Liquidity risk

Extension risk

Volatility risk

C di i k Credit risk

Di ifi ti Diversification

Detail Desc iption ElementsDetail Desc iption ElementsDetail Description ElementsDetail Description Elements

Description of the holding Type (T-Bill, T-Note, FNMA, CD Bank XX, etc.) Par (face amount) Coupon rate Purchase yield Purchase date )settlement not trade date)

M i D ( d ll d if li bl ) Maturity Date (and call date if applicable)

Book value – amortized value of the security Market value – price it could be sold for today

Earnings for the period Earnings for the period Accrued + Net Accretion/Amortization

I t R tI t R tInventory Report Inventory Report Sample Inventory ReportA fAs of xx-xx-xx

Purchase Beginning Beginning Ending Ending Mo.Date Security Coupon Maturity Yield Book Market Book Market Earnings

T iTreasuries

4-5-xx T-Bill 0% 1-16-xx 4.22% 101,486 102,100 102,570 102,100 1,0845-10-xx T-Bill 0% 2-22-xx 4.35% 251,488 252,980 251,999 253,005 5112-4-xx T-Bill 0% 5-15-xx 4.52% 190,025 194,020 192,005 192,401 1,9807-9-xx T-Note 5% 8-15-xx 4.75% 354,898 355,390 354,300 366,980 860

Agencies 11-20-xx FNDN 0% 3-7-xx 4.41% 107,642 107,666 107,999 107,000 357

7-3-xx FHLB 5% 6-4-xx 5.25% 104,567 104,750 104,850 106,010 1,766

CDs 3-5-xx BankOne 4% 3-5-xx 4.00% 98,000 98,000 98,327 98,327 3277-8-xx BankTwo 3% 1-8-xx 3.00% 95,454 95,454 95,691 95,691 237

Pools

xx-xx-xx Pool #1 0% xx-xx-xx 4.37% 120,123 102,123 120,999 120,999 876

TOTALS 1,423,683 1,412,483 1,428,740 1,442,513 7,998

Diversification by SectorDiversification by Sector

By Market Sector

40

50

60

70

TreasAgency

By Market Sector

Shows diversification

0

10

20

30

0 g yCDPool

Shows diversification

Illustrates Risks Illustrates Risks Too short Too long Too long Barbelled

Di e sification b Mat itDiversification by Maturity35

15

20

25

30

O/n0-3 mo3-6 mo6-9 mo9 12

0

5

109-12 mo

By maturity breakdown Shows coverage of liabilitiesShows coverage of liabilities

Funds concentration on near-by liabilities Plus use of longer opportunities

Pool/F nd Repo tingPool/F nd Repo tingPool/Fund Reporting Pool/Fund Reporting Pools and Funds price and value Pools and Funds price and value

designed to show risk to investor

Constant dollar (money market equivalents) Price is always $1 Days-to-maturity is always 1 day Days-to-maturity is always 1 day

Mutual fund equivalentsP i e i the net et l e o h e p i e th t d Price is the net asset value or share price that day

Days to maturity is the WAM of the underlying portfolio

Benchma ksBenchma ksBenchmarksBenchmarks

Purpose Risk or performance?

Selection with yield versus rate of returnC bilit Comparability

Sector recognition Comparable treasury versus indexComparable treasury versus index

Always compare same periods

Benchma ksBenchma ksBenchmarksBenchmarks Measure Risk and Performance

Sample Benchmarks

Comparable Treasury Yields 3-Mo, 6-Mo, 1 Yr

Fed Funds Pools or S&P’s LGIP Index Pools or S&P s LGIP Index GFOA “Public Investor” Benchmarks Government Bond Indexes

Summaries Tell the Story Summaries Tell the Story

Beginning Book Value 10,100,000 Beginning Book Value 10,100,000 Beginning Market Value 10,400,000 Beginning WAM 240 days

Ending Book Value 10,150,000 Ending Market Value 10,500,000 Change in market value 100,000 Earnings for Period 4,160 Ending WAM 280 daysEnding WAM 280 days

Period Average Yield 2.40 %Period Average Benchmark Yield 2 10 % Period Average Benchmark Yield 2.10 %

If you are more than 0.75% from your benchmark you should know why!

Ann al GASB Repo tingAnn al GASB Repo tingAnnual GASB ReportingAnnual GASB Reporting

GASB focus is on risk

Displays fiduciary responsibility and public trust

Annual risk disclosure Collateral risk Safekeeping risk Volatility risk Credit risk

Government Accounting Standards Board

GASB 31GASB 31GASB 31GASB 31

Fair Market Evaluation Designed to show change in market value Annual reporting only Entry is made and reversed

Too m ch olatilit eq als olatilit isk Too much volatility equals volatility risk

Discloses risk created by change of market price Discloses risk created by change of market price

Only used for securities > one year onlyy y y

GASB 40GASB 40GASB 40GASB 40

Disclosure is aimed at:

Credit risk including credit quality from rating agenciesagencies

Interest rate risk disclosure including WAMs and specific derivatives

Interest rate sensitivity Primarily on structured notes

Foreign exchange (currency) risk Foreign exchange (currency) risk

Texas PFIA Makes GASB 40 Texas PFIA Makes GASB 40 Reporting EasyReporting Easy

All areas are covered by policy and approved by governing body

Reporting Credit Exposures: All Agencies are AAAg Credit ratings critical on CP, BA, Corporates Procedure to monitor credit in policies

Reporting Interest Rate Exposures:p g p % Callables or other structured notes

Requires listing of callable and structured notes only

Reporting Interest Rate Exposures: Maximum Maturity Weighted Average Maturity Benchmarks

S h t d I dS h t d I d b t tib t tiSo what do I doSo what do I do –– about reportingabout reporting

Recognize amortized book value Recognize accretion and amortization

Get independent pricing source

Report monthly if possible – quarterly requiredHoldings report for detail Holdings report for detail

Management reports/information for summary view

Use benchmarks

S ttl tS ttl tSettlement Settlement Require delivery versus payment (DVP) q y p y ( )

It is the law No broker safekeeping

Send every broker your delivery instructions Send every broker your delivery instructions Get the instructions from your bank Instructions are your ABA number and account

Document by trade ticket and confirmation Document by trade ticket and confirmation Clearing confirmation shows security arrived Safekeeping receipt shows bank is holding the security

?

ABA 11-12345611for account of ------ Districtfor account of District

P chases and SalesP chases and SalesPurchases and SalesPurchases and Sales

Settlement Cash (same day) Regular (next day)

d ( l ) ff (b ) Bid (sale) vs. Offer (buy)

Independent safekeeping Independent safekeeping

D li d S ttl t LD li d S ttl t LDelivery and Settlement LanguageDelivery and Settlement Language

Federal Reserve’s FedWire DTC (Depository Trust Corporation)( p y p ) PTC (Participatory Trust)

Delivery versus Payment Free Delivery Free Delivery

DK (“Don’t know” the trade) DK ( Don t know the trade)

Ho Do I B a Sec it ?Ho Do I B a Sec it ?How Do I Buy a Security?How Do I Buy a Security?

Security Transactions Banks

Can sell depository CD or be a brokerCan sell depository CD or be a broker Broker/Dealers

Can sell securities of different types

Advice and Management Investment Advisers

Fi d titi l bid d h f Find, competitively bid and purchase for you Can not sell anything Act as your investment officer

Access to the Ma ketAccess to the Ma ketAccess to the MarketAccess to the Market

Brokers/dealers access the markets Market distribution process Market distribution process A broker puts buyer and seller together

A d l ll iti f i t A dealer sells securities from an inventoryUS

Treasury US AgenciesCorporate

entitiesTreasury entities

-Primary dealer structure

--Selling groups

-- banks and investment bankers

Banke sBanke sBankers Bankers

Bankers selling a traditional depository CD

Banks acting as a broker

If your bank holds your securities they can not be your broker Does not perfect DVP

Banks are not advisers Still need multiple brokers for competition

New factors for depository CD: Terrorism Act documentation Collateralized versus FDIC funds

Bank CD T ade SettlementBank CD T ade SettlementBank CD Trade SettlementBank CD Trade Settlement

Getting yields from multiple banks Check for details

Day count coupon pay dates good maturity Day count, coupon pay dates, good maturity

Get Policy Certification y

If not FDIC, need Depository Collateral Agreement

Terrorism documentation takes time

B oke o DealeB oke o DealeBroker or DealerBroker or Dealer

Broker No inventory

Dealer Maintains inventory

FINRA Regulation Transaction based FINRA Regulation

Capitali ation

FINRA Regulation

Primary Dealer Capitalization Retail -Institutional

y Reports to NY Fed Capital monitored

O k di Open market trading for NY Fed

Liquidity providerq y p FINRA

Primary Dealer List Primary Dealer List yywww.ny.frb.orgwww.ny.frb.org

B oke /Deale s Ad iseB oke /Deale s Ad iseBroker/Dealer vs. AdviserBroker/Dealer vs. Adviser

Broker/Dealers sell a security

Advisers SEC i t d d i SEC registered as advisers Must have a CRD #

Can not charge on a transaction/security Can not charge on a transaction/security Portfolio perspective

O l d i d titi f Only an adviser can do competitives for you

Ad ise sAd ise sAdvisersAdvisers

SEC registered under 1940 Act

A ‘money manager’ who advises and can not sell a A money manager who advises and can not sell a security

Discretionary vs non-discretionary management Discretionary vs non-discretionary management public is always non-discretionary because of cash flows

A ‘broker’ can not be an adviser A broker can not be an adviser A broker can not do your competitive bidding

Whe e is Yo P otectionWhe e is Yo P otectionWhere is Your Protection Where is Your Protection

What danger do you really have?????

Peer Experience and References Credit Lines Capital Adequacy

A standard not a guarantee Government Security Dealer Act 1986 (structure) Government Security Dealer Act 1986 (structure) Government Securities Act 1993 (standards)

SIPC INSURANCE ONLY APPLIES FOR BROKER HELD SECURITIES – DO NOT ASK FOR OR DEMAND SIPC

FINRA (Financial Institutions Regulatory Authority)Self regulatory body Self regulatory body

FINRAFINRA fin a o gfin a o gFINRAFINRA finra.orgfinra.org

Selecting a B okeSelecting a B okeSelecting a BrokerSelecting a Broker

Determined by portfolio needs Local versus non-local

Primary versus secondary Primary versus secondary Banks How many brokers?y What due diligence?

NEVER b k f k i NEVER use broker safekeeping Your policy and the law say DVP settlement move securities to your depository bank

C tifi ti i T 2256 005(k)C tifi ti i T 2256 005(k)Certification in Texas 2256.005(k)Certification in Texas 2256.005(k)

This is not a guarantee – it affords little or no protection

Policy must be given to any person offering to engage in an investment transaction Brokers and bankers (including pools and advisers)

“execute a written instrument in a form acceptable to the investing entity…and the business organization substantially to the effect that”

Fi h i d d i d th li Firm has received and reviewed the policy Firm has established controls to sell only approved securities

Nothing relieves the entity from responsibility for monitoring forNothing relieves the entity from responsibility for monitoring for policy compliance

S b k i f tifi tiS b k i f tifi tiSome brokers view of certification…Some brokers view of certification…

POLICY CERTIFICATION FORM as required by Texas Government Code 2256.005(k)

(the “Entity”) ________________ (the Entity ) ________________ (the “Firm”)

I AM A BROKER. I HAVE PERUSED THE POLICY. I WILL TRY KINDA, SORTA, MAYBE, PERHAPS ATTEMPT TO NOT SELL YOU

ANY OF THE FUNKY, *&$^%% SECURITIES MY DESK OFFERS. , $

Firm: _______________________________________

Signature _______________________________________

Ann al B oke /Deale ListAnn al B oke /Deale ListAnnual Broker/Dealer List Annual Broker/Dealer List

PFIA requires an annual adoption of list Investment committees can adopt list

A fi li h id d ifi i Any firm on list must have provided certification

List is for broker/dealers only List is for broker/dealers only Banks may change as CD rates are found Pools are already authorized by Board actionPools are already authorized by Board action

May list banks and pools for informationy p

Doc ments fo Yo B okeDoc ments fo Yo B okeDocuments for Your BrokerDocuments for Your Broker

Before Selection Questionnaire

Investment Policy Investment Policy Certification

Aft S l ti After Selection CAFR Trading Authorization

Y d li i t ti Your delivery instructions Tax identification number No account application (safekeeping agreement)

Broker Dealer QuestionnairesBroker Dealer Questionnaires Differentiate between brokers and primary brokersp y

All brokers: firm information contact broker information delivery instructions delivery instructions public client references

N P i B k Non-Primary Brokers: market sector involvement

Basic Q estionnai e InfoBasic Q estionnai e InfoBasic Questionnaire InfoBasic Questionnaire Info

Name of Firm: __________________ CRD #___________________Address: ___________________________________________________ Primary Representative on account: ___________________________________Telephone: ________________ Fax: _______________________________

E-Mail: ______________________________________________Broker CRD#Broker CRD# ___________________________Backup representative or trading assistant: ______________________________Telephone: ___________________________________________ E-mail: ___________________________________________Branch Manager: ___________________________________________Telephone: ______________________________________ Fax: ____________________________________________ E-Mail:E Mail: ____________________________________________

Q estionnai eQ estionnai eQuestionnaireQuestionnaireIs the firm designated as a Primary Dealer by the Federal Reserve? __________________g y y __________________Is the firm registered with the tx State Securities Board? __________________________Is the firm and representative registered with FINRA? ___________________________How long has the designated representative been an institutional fixed income broker at thi firm?this firm? ____________________In total? _____________________

In what market sectors does the account representative specialize? Treasuries ? _________ Agencies? _________ MBS? _________

Delivery instructions: ___________________________________________________

All transactions will be completed delivery versus payment.

NonNon P ima Info mationP ima Info mationNonNon--Primary InformationPrimary Information

FINRA Registration and CRD Report State Securities Registration Market Involvement Public Sector Involvement

Refe ences References

Audited Financial Statements Audited Financial Statements provided annually

So hat do I do ?So hat do I do ?So what do I do…?So what do I do…?

Finding brokers to use Peer group ideas and references Use at least 3 – bank/broker

Use at least one primary and all institutional brokers Feel comfortable with the person

It’s a telephone market – no need to meet

Establishing a relationship Talk about your policy and limits

G t b i i f ti Get basic information Backup person and numbers Delivery instructions

Send your policy and certifications Send your policy and certifications Modified certifications

And then hat ?And then hat ?And then what…?And then what…?

Making an investment Set your time horizon

Set the maximum maturity date

Tell the brokers what you need/want “I need the best rate not past xx/xx/xx in an agency or I need the best rate not past xx/xx/xx in an agency or

treasury”

Wait for them to do the research They will bring back alternatives for you to chose from

Make the decision Inform them all what you bought (the “cover”) Inform them all what you bought (the cover ) Feedback is important

And then ?And then ?And then…….?And then…….?

You chose on date and yield Do not go past your due date if it is set Chose the highest yield (true or gov’t yield)

Settling the security The broker has your delivery instructions Tell your bank it is coming (trade ticket) Broker will send the bond to the bank

In estment StepsIn estment StepsInvestment StepsInvestment Steps

Set your maximum date (your time horizon)

Set your maximum money to invest

Have a general idea of where rates are

Look at value in all markets available

Look at them all !Look at them all !Look at them all !Look at them all !

Check the alternatives authorized for you:

CD 3.01 % T-Bill 3.85 % FNMA disco 4.01 %

FNMA note 4 00 % FNMA note 4.00 % FHLMC note 4.07 % SLMA note 4.09 % TVA note 4 12 % TVA note 4.12 %

What are your considerations?What are your considerations?

The B ing DecisionThe B ing DecisionThe Buying DecisionThe Buying Decision

Determine the maximum maturity (time horizon) Do not go beyond that maturity Request offers short of or on that date Request offers short of or on that date

Offers will differ in maturity and type Are they all authorized? Do they fit diversification? Do I know what they are?

Chose the best yield

Your decision will Your decision will notnot be simply on be simply on p yp yprice of one securityprice of one security

TBill 8/8/13 1.75%

TBill 8/8/13 1.79% TBill 8/8/13 1.79%

TBill 8/8/13 1 80% TBill 8/8/13 1.80%

Yo decision ill beYo decision ill beYour decision will beYour decision will be

Treasury 11/23/09 4.95 % FHLB DN 11/15/09 5 15 % FHLB DN 11/15/09 5.15 % FNMA DN 11/20/09 5.10 %

FNMA DN 11/10/09 5 11 % FNMA DN 11/10/09 5.11 % FHLB 2% 11/17/09 5.15 %

Which do you chose and why? Which do you chose and why?

Making the DecisionMaking the DecisionMaking the DecisionMaking the Decision

Need: $500,000 payroll out ten months Choices: Treasuries, CD, Agency, Pool Curve: Stable and normal upward slope

Yields Yields: CD 7/25 3.80 % T-Bill 7/19 3 90 % T Bill 7/19 3.90 % FNMA DN 7/18 4.30 % Pool 3.75 %

Making the DecisionMaking the DecisionMaking the DecisionMaking the Decision

Need: $500,000 payroll out ten months Choices: Treasuries, CD, Agency, Pool

Curve: Flat talk of a Fed increase this month Curve: Flat, talk of a Fed increase this month

Yields: CD 7/25 3.80 % T-Bill 7/19 3.90 %

FNMA DN 7/18 4 30 % FNMA DN 7/18 4.30 % Pool 3.75 %

Making the DecisionMaking the DecisionMaking the DecisionMaking the Decision

Need: $500,000 payroll out ten months Choices: Treasuries, CD, Agency, Pool Curve: Economy looks bad Curve: Economy looks bad

Yields:CD 7/25 3 80 % CD 7/25 3.80 %

T-Bill 7/19 3.90 % FNMA DN 7/18 4.30 % Pool 3.75 %

Relati e Val e b YieldRelati e Val e b YieldRelative Value by YieldRelative Value by Yield

Investment out about six months… no specific liability

T-Bill 5.22 % T-Note 5.28 % FNMA 5.50 % FHLMC 5.52 %

GE CP 5 55 % GE CP 5.55 % FFCB 5.40 % CD 3.50 %

Which one do you NOT use?y What are your considerations?

Relati e Val e b YieldRelati e Val e b YieldRelative Value by YieldRelative Value by Yield

Longer term investment out 1.5 years…core investment

T-Note 1.10 % FNMA 1.20 % FHLMC 1.20 % FFCB 1.30 %FFCB 1.30 % WB 1.50 % CD 1.75 %

What are your considerations ? What are your considerations ?

R l ti V l Ch iR l ti V l Ch iRelative Value ChoicesRelative Value Choices

In Six Months

T-Bill 0.16 %

In One Year

T-Bill 0 19 %T Bill 0.16 %FNMA DN 0.17 %FHLMC DN 0.18 %GM CP 0 20 %

T-Bill 0.19 %FHLB 0.22 %T-Note 0.20 %FFCB DN 0 19 %GM CP 0.20 %

T-Note 0.15 %CD 0.40 %Pool 0 20 %

FFCB DN 0.19 %FHLMC 0.21 %CD 0.85 %

Pool 0.20 %

Real Val eReal Val eReal ValueReal ValueWhich one would you choose?

Rate Maturity Bid Asked Chg Ask Yld5 3/4 May 11 97:16 97:18 -4 6 615 3/4 May 11 97:16 97:18 4 6.61

10 3/4 May 11 111:14 111:16 - 0 6.61

B the disco ntB the disco ntBuy the discountBuy the discount

5 3/4 Apr 11 10 3/4 Apr 11

Price 97/16 Yield 6.61 %

Price 111/14 Yield 6.61 %

PAR 1,000,000 Prin 975,625

Acc 19 271

PAR 1,000,000 Prin 1,116,875

Acc 31 600 Acc 19,271 Net 994,896

Acc 31,600

Net 1,148,145

Active StrategiesActive StrategiesggExpand on the Same BasicsExpand on the Same Basics

Ad t Advantages Improved yields

Utilize market opportunities Utilize market opportunities

TechniquesTechniques yield curve analysis (rate anticipation) riding the curve spread and sector analysis market timing swaps swaps

La ge EntitiesLa ge EntitiesLarger EntitiesLarger Entities

Some “core” cash Fund types provide additional opportunity Annual review required Rewards and responsibilities

One or more constant dollar pools Bank sweep accounts Bank sweep accounts Flex for large bond funds Ladder of securities matching liabilitiesg

Steps in Developing Steps in Developing p p gp p ga Market Viewa Market View

1. Perspective on world and geo-political situation

2. View of business environment

3 Ma ket and economic conditions3. Market and economic conditions Yield curve movement Relative value Relative value

4. Your unique situationq

So hat do I doSo hat do I do abo t all thisabo t all thisSo what do I do So what do I do –– about all thisabout all this

Do your cash flow Write your policy

Choose at least two brokers and qualify them Choose at least two brokers and qualify them Create a short term ladder

Out to 4-6 months Create a longer term ladder

if rates are favorable to go further If not move extra funds to the “high” point in rates If not move extra funds to the high point in rates

Do competitive bidding Do delivery versus payment Get started!

Be careful Be careful –– Get started Get started ––Good luck!Good luck!Good luck!Good luck!

Linda T. PattersonPatterson & Associates

Austin, TXlinda@patterson.net