FGFOA. The Current Market for Treasury Management & Your Cash Flow Modeling. Presented by: Wertz York Capital Management Group

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1 The Current Market for Treasury Management & Your Cash Flow Modeling Presented by: Wertz York Capital Management Group Mitchell P. York, CFA (813) x201 Jeff Huenink (813) x203 December 15, 2011 FGFOA

2 The Current Market for Treasury Management Presented by: Mitchell P. York, CFA Mitch is a principal of Wertz York Capital Management Group. In 1999, he earned the Chartered Financial Analyst (CFA) designation. He is a member of the Financial Analyst Society of Tampa Bay and the CFA Institute. Mitch is a graduate of the University of South Florida (Master's in Economics) and Eastern Kentucky University (BBA Finance). At Wertz York, Mitch focuses on portfolio management including interest rate hedging and duration strategies. He has broad experience including research economics, econometrics as well as teaching college level economics and finance at the University of South Florida and Florida Southern College. December 15, 2011 FGFOA

3 Your Cash Flow Modeling Presented by: Jeff Huenink Jeff is a former member of the Florida Legislature and brings a unique knowledge and perspective to serving government clients. In 1998 Jeff and his partners took their company public where it is still listed on the New York stock exchange. Jeff has been on numerous community and international boards including Moffitt Cancer Center and Three Strand Cord. Jeff has been named as the outstanding alumni of the University of South Florida s College of Business. Jeff Huenink majored in Finance and Marketing at USF. December 15, 2011 FGFOA

4 December 15, 2011 FGFOA

5 Outline 1. Current Interest Rates a. Yield curves b. Market spreads c. Implications The Current Market for Treasury Management & Your Cash Flow Modeling" 2. Interest Rate Forecasts a. Implied forward rates b. Forecasts from primary dealers, economists and financial firms c. Implications 3. Money Market Mutual Funds a. Yields b. Risks 3. Cash Flow Modeling

6 Current Interest Rates

7 Current Interest Rates I am more concerned about the return OF my money than the return ON my money. Mark Twain

8 Current Interest Rates Treasury Yield Curves

9 Current Interest Rates Why are money market and short-term rates so low? Federal Reserve policy: A Fed Funds rate effectively at 0% Federal Reserve released a statement saying they will not raise rates until after Q2 of 2013 The fear trade (Eurozone is imploding / global recession)

10 Current Interest Rates Treasury Yield Curves

11 Current Interest Rates Treasury Yield Curves

12 Poll Questions #1 Has your local government implemented a formal cash flow management system? a) Yes b) No c) I don t know

13 Current Interest Rates Credit Spread the interest rate differential between two securities that are exact except for credit rating. The extra interest that must be offered to entice an investor into a more risky investment. LIBOR the London Interbank Offered Rate It is the rate at which the largest banks are willing to lend each other (short-term). It is also used as an index to price other short-term investments (floating rate bonds, commercial paper, etc.)

14 Current Interest Rates

15 Current Interest Rates 2004: Credit Spreads

16 Current Interest Rates 2008: Credit Spreads

17 Current Interest Rates 2011: Credit Spreads

18 Current Interest Rates 2011: Credit Spreads

19 Current Interest Rates 2011: Eurobank Spreads

20 Current Interest Rates 2004: Eurobank Spreads

21 Interest Rate Forecasts Implied forward rates: The current yield curve may tell us what future forward interest rates will be. Example the yield on a 2-year Treasury should be equal to the average yield of two consecutive 1-year Treasuries. So let s look at what the expected 1-year Treasury rate will be 1 year from now.

22 Interest Rate Forecasts 1-yr Treasury = 0.08% and the 2-yr Treasury = 0.22% One year from today the 1-yr Treasury rate should be: 0.22% = (0.08% +?%) / 2 =? = 0.36% The 1-year Treasury is expected to yield 0.36% 1 year from today.

23 Poll Questions #2 One year from today, the stock market will be a) Higher b) Lower c) Unchanged

24 Interest Rate Forecasts What the analysts are projecting: Fed Funds Three-month LIBOR 2-year Treasury Notes 10-year Treasury Bonds Source: Bloomberg. Forecasts reported by more than 60 analysts / economist as collected by Bloomberg.

25 Interest Rate Forecasts: Fed Funds

26 Interest Rate Forecasts: Fed Funds

27 Interest Rate Forecasts: 3mo LIBOR

28 Interest Rate Forecasts: 3mo LIBOR

29 Interest Rate Forecasts: 2yr Treasury

30 Interest Rate Forecasts: 2yr Treasury

31 Interest Rate Forecasts: 10yr Treasury

32 Interest Rate Forecasts: 10yr Treasury

33 Interest Rates / Forecasts: Implications Yield curve not constructive on telling us economic conditions or expectations Markets are very confident in forward rates / forecasts Short-term rates will remain low for a couple more years There still exists a risk premium in the money markets Can have confidence in interest income projections Diversify! Risks are still amplified

34 Poll Questions #3 To get down on a knee and start praying, even if everyone else around you is doing something completely different is called: a) Tony Dungying b) Tebowing c) Obamafying

35 Money Market Mutual Funds

36 Money Market Mutual Funds Issue New Rule 1) Weighted Average Maturity (WAM) 2) Weighted Average Life to Maturity (WALM) 1) 60-day maximum weighted average maturity for money market funds versus old 90 day rule. 2) 120-day maximum weighted average life to maturity for money market funds. Under the Rule as amended, a security s final maturity date will be used in calculating WALM. Old rules did not address WALM. Why is this important? Much more difficult for MMMFs to achieve yield.

37 Money Market Mutual Funds Fund Port. Assets ($mils) 7-Day Yield WAM (Days) JPMorgan Prime MMF/Capital $111, % 43 BlackRock Liquidity:TempFund Inst $47, % 38 Federated Prime Oblig Fund/Instit $47, % 36 Fidelity Instit Prime MMF/Instit $54, % 40 Fidelity Instit MMF/Instit $60, % 51 Dreyfus Cash Mgmt/Instit $28, % 26 Vanguard Prime MMF/Instit $115, % 59 Goldman Sachs FS Prime Oblig/Inst $25, % 48 State Street Inst Liq Reserves/Inst $22, % 24 Wells Fargo Adv Heritage MMF/Select $35, % 35 Source: Imoneynet.com 12/12/2011

38 Money Market Mutual Funds Fund US Treasury(%) US Other(%) Repo(%) Time Deposits(%) Domestic Banks(%) Foreign Banks(%) 1st Tier CP(%) 2nd Tier CP(%) FRNs(%) ABCP(%)* BlackRock Liquidity:Temp Dreyfus Cash Mgmt Federated Prime Oblig Fidelity Instit MMF Fidelity Instit Prime MMF Goldman Sachs FS Prime JPMorgan Prime MMF State Street Liq Reserves Vanguard Prime MMF Wells Fargo Adv Heritage Average:

39 Money Market Mutual Funds 0.25% Correlation of yield to % allocation to foreign bank obligations 7-Day Yield 0.20% 0.15% 0.10% 0.05% 0.00% 7-Day Yield % Allocation to Foreign Banks

40 Money Market Mutual Funds 70 Correlation of weighted average maturity to yield WAM (Days) WAM (Days) % 0.05% 0.10% 0.15% 0.20% 0.25% 7-Day Yield

41 Money Market Mutual Funds: Implications Risk and return are correlated. MMMFs are extending WAM and allocating to riskier investments to obtain yield. Know your MMMFs. Review their asset allocation and look for changes in asset allocation. Diversify! Spread out manager risk and asset allocation risks.

42 Poll Questions #4 True or false: Florida s economy will be significantly better by the end of a) True b) False

43 Cash Flow Model - Outline o Calendar of Ending Cash Balance o Key Benefit Projecting Cash Balance o Design o Reports

44 Cash Flow Model - Calendar of Ending Cash Balance o A basic cash flow schedule of dates, amounts, and balances o Source depends on type of analysis o Addition of projected transactions allows for planning o Adding multiple cash accounts increases usefulness

45 Cash Flow Model Key Benefit Projecting Cash Balance o Maximize investment earnings Government entities have more predictable revenue and expenditure Primary benefit is maximizing earnings o Justification for certain types of borrowing Operating funds cash flow schedule to justify tax exempt borrowing o Production Planning Cash flow of funds and capital are essential in planning short-term borrowing

46 Cash Flow Model Design What "Cash" to Track o Ideally, ending balance on liquid funds (Bank DDA s, MMA s, Money Market Funds, etc) o CD s, securities, or pooled investment accounts should not be included

47 Cash Flow Model Reports Cash Flow Schedule, Daily Detail

48 Cash Flow Model Reports Cash Flow Schedule Weekly Summary

49 Cash Flow Model Reports: Cash Flow Schedule 250,000, ,000, ,000, ,000,000 50,000,000 0 (50,000,000) (100,000,000) (150,000,000) (200,000,000) (250,000,000) Monthly Cash Flow Subtotals (300,000,000) Millage Payroll Bank Transfers Ending Balance

50 Cash Flow Model Reports: Cash Flow Schedule 300,000, Monthly Cash Flow Subtotals 250,000, ,000, ,000, ,000,000 50,000,000 0 (50,000,000) (100,000,000) (150,000,000) (200,000,000) (250,000,000) Millage Payroll Bank Transfers Ending Balance

51 Cash Flow Model Reports: Cash Flow Schedule 250,000, Monthly Cash Flow Subtotals 200,000, ,000, ,000,000 50,000,000 0 (50,000,000) (100,000,000) (150,000,000) (200,000,000) Millage Payroll Bank Transfers Ending Balance

52 Cash Flow Model Reports: Possible Investments Chart

53 Cash Flow Model Reports: Bank Balance Chart

54 THANK YOU

Treasury Floating Rate Notes

Global Banking and Markets Treasury Floating Rate Notes DATE: April 2012 Recommendation summary The USD 7trn money market should support significant FRN issuance from the Treasury. This would diversify