Investing Public Funds

Transcription

1 June 22, 2016 Investing Public Funds MINNEAPOLIS BOSTON CHICAGO LONDON LOS ANGELES NEW YORK PORTLAND SAN FRANCISCO ZURICH

2 Disclosure Nothing herein constitutes a recommendation of any security, nor is it intended to provide all information sufficient to make an investment decision. The information provided herein is not intended to be and should not be construed as a recommendation or advice within the meaning of Section 15B of the Securities Exchange Act of Please refer to the last page of these presentation materials for additional disclosures.

3 Overview Eligible Investment Descriptions Investment Strategies and Best Practices Appendix About Piper Jaffray Q&A Economic Recap 2016 Piper Jaffray & Co. Since Member SIPC and NYSE

4 What is a Bond? Definitions: a uniting or binding element or force v: join or be joined securely to something else, typically by means of an adhesive substance, heat, or pressure. n: an official document that states you will be paid a certain amount of money because you have lent money to a government or company n: an agreement with legal force, in particular.

5 Eligible Investment Details Summary of Idaho Statute United States Treasury Notes and Bills Municipal Bonds Within Idaho Only U.S. Government Agency Bonds Commercial Paper Prime rated Money Market Funds Corporate Bonds A rating or higher by at least one rating agency Other Bank Investment products, i.e. Banker s Acceptances, Deposit Accounts, Repurchase Agreements, FDIC Insured CDs PIPER JAFFRAY 5

6 Eligible Investment Details U.S. Treasuries Obligations of the United States Treasury Issued as Bills, Notes, Bonds, and zeros or strips. High level of security and liquidity T-Bills: Discounted securities issued with 3-month, 6-month, and 1-year. T-notes and T-bonds: 2-year, 3-year, 5-year, 7-year, 10-year, and 30-year issued maturities. Denominations as small as $1, Next business day settlement is standard. Can be purchased for same day or delayed settlement. PIPER JAFFRAY 6

7 Eligible Investment Details U.S. Treasury Yield Curve 6/20/2016 Source: Bloomberg PIPER JAFFRAY 7

8 Eligible Investment Details U.S. Treasury Yield Curve 6/20/2001 Source: Bloomberg PIPER JAFFRAY 8

9 Eligible Investment Details U.S. Treasury Yield Curve 6/20/2001 6/20/2006 Source: Bloomberg PIPER JAFFRAY 9

10 Eligible Investment Details U.S. Treasury Yield Curve 6/20/2001 6/20/2006 6/20/2011 Source: Bloomberg PIPER JAFFRAY 10

11 Eligible Investment Details U.S. Treasury Yield Curve 6/20/2001 6/20/2006 6/20/2011 6/20/2016 Source: Bloomberg PIPER JAFFRAY 11

12 Eligible Investment Details Municipal Bonds Issued by an Idaho Public Entity or Corporation Idaho only General Obligation bonds of the state, or of any county, city, metro water district, utility district, school district, or other taxing district. Tax anticipation notes, income or revenue bonds of the state of Idaho or of taxing districts of the state. Can be taxable or tax-exempt No minimum ratings and no maximum maturity PIPER JAFFRAY 12

13 Eligible Investment Details U.S. Agencies (Govt. Sponsored Entities) Obligations of agencies of the U.S. government Issued as Discount Notes and Bonds High level of security - Supported by an implicit obligation of the U.S. Government High level of liquidity Higher yield than U.S. Treasuries Discount Notes: Discounted securities with 1-day to 1-year maturities. Agency Bonds: Issued at a dollar price from 6-months to 30-years. PIPER JAFFRAY 13

14 Eligible Investment Details U.S. Agencies (Continued) Agency bonds are issued as callable, non-callable, fixed rate coupon, floating rate coupon, and step-up (or step-down) coupons. AGENCY ISSUERS: FHLB (Home Loan) Federal Home Loan Bank FNMA (Fannie Mae) Federal National Mortgage Assoc. FHLMC (Freddie Mac) Federal Home Loan Mtge. Corp. FFCB (Farm Credit) Federal Farm Credit Bank TVA Tennessee Valley Authority FAMCA (Farmer Mac) Federal Agricultural Mtge. Corp. PIPER JAFFRAY 14

15 Eligible Investment Details U.S. Agencies (Continued) Non-callable bonds also known as Bullets Callable bonds are issued with a variety of structures Callable structures can vary based on lock-out and call-type. o Lock-out is the period of time between initial settlement and first call date. o Call types are based on frequency and number of the issuers call options. European (Euro or 1X): Callable only 1-time Bermudan (Berm): Periodic, most common frequency is quarterly. American (Continuous): Callable anytime, or continuously, after Lock-out. PIPER JAFFRAY 15

16 Eligible Investment Details U.S. Agencies (Continued) AGENCY EXAMPLES: 5yr NC o 5-year final maturity o NC is not followed by an initial call date; therefore, this bond is non-callable or a Bullet 3yr NC 1yr 1X o 3-year final maturity o NC Non-call o 1-year initial call o 1X 1-time PIPER JAFFRAY 16

17 Eligible Investment Details U.S. Agencies (Continued) Why would an issuing agency call a bond? Current market rates vs. coupon when the bond was issued. Cushion bonds Higher probability of being called due to higher coupon or structure. Best time to buy certain structures Expectations for stable rates versus a rising or falling rate environment. Fixed vs. Floating In a rising or falling rate environment, floating rate notes hold amortized value, all else unchanged. PIPER JAFFRAY 17

18 Callable Agencies Proceeds (Cost) A Callable Bond: 1MM for 2-yrs, Priced at Par ($ per bond) 6/24/16 Settlement Price Coupon Interest Payments Yield Maturity $1,000,000 $ % $5,000 12/24/2016 6/24/2018 Callable 1-time in 1-year $5,000 6/24/ % $5,000 12/24/2017 $5,000 6/24/ % $1,000,000 PIPER JAFFRAY 18

19 Callable Agencies Proceeds (Cost) A Callable Bond: 1MM for 2-yrs, Priced at Par ($ per bond) 6/24/16 Settlement Price Coupon Interest Payments Yield Maturity $1,000,000 $ % $5,000 12/24/2016 6/24/2018 3/24/ % $5,000 6/24/ % Callable quarterly 9/24/ % $5,000 12/24/ % 3/24/ % $5,000 6/24/ % $1,000,000 PIPER JAFFRAY 19

20 Callable Agencies Cushion Callables Priced at a premium, these are callable bonds that appear to have a high probability to be called prior to maturity, based on the following factors: Current market interest rates. The expected rate an issuer may be able to underwrite a new bond, with a similar maturity on an upcoming call date. Structure is a factor o Step-up coupons o 1-time call versus continuous or quarterly call The yield to call (YTC) should exceed comparable, non-callable, investment alternatives to the anticipated call date. PIPER JAFFRAY 20

21 Callable Agencies A Callable Bond: 1MM for 2-yrs, Priced at a Premium A Cushion bond. (Greater than $ per bond) Proceeds (Cost) Price Coupon Interest Payments Yield Maturity $1,012,450 $ % $10,000 12/24/2016 6/24/2018 Callable 1-time in 1-year $10,000 6/24/ % $10,000 12/24/2017 $10,000 6/24/ % $1,000,000 PIPER JAFFRAY 21

22 Callable Agencies Source: Bloomberg PIPER JAFFRAY 22

23 Eligible Investment Details Commercial Paper (CP) Prime rating (A-1 or P-1 or F1) Typically $100,000 minimum, some are $250,000 Purchased at a discounted price zero coupon Interest is earned at maturity the investment accretes to par. Maturities from 1-day to 360-days PIPER JAFFRAY 23

24 Eligible Investment Details Money Market Funds Money Market Funds are a $2.7 trillion market. THEY OFFER: Diversification Daily Liquidity Strong Credit Quality Dodd-Frank legislation being implemented in 2016 Floating Rate NAV on Prime Funds Stable Value (dollar in/dollar out) on Government only funds PIPER JAFFRAY 24

25 Eligible Investment Details Sample Money Market Rates Money Market Fund Rates Ticker Fund Ratings 7-day Yield DADXX Dreyfus Cash Advantage AAA S&P 0.38 GOFXX Federated Govt Obligation Fund AAA S&P, MDY FITCH 0.21 PCOXX Federated Prime Cash Obligations AAA S&P, MDY FITCH 0.37 POIXX Federated Prime Obligations Fund AAA S&P, MDY FITCH 0.38 TMPXX Blackrock Provident Inst Tempfund AAA S&P, MDY FITCH 0.43 TMCXX Blackrock Liquidity Funds Tempcash N/A 0.36 TFDXX Blackrock Provident Inst Fedfund AAA S&P, MDY FITCH PIPER JAFFRAY 25

26 Eligible Investment Details Corporate Bonds Issued by any corporation organized, controlled, and operating within the United States. Must have a rating of A or higher by a commonly known rating service. Statute doesn t impose maturity limit pros & cons Coupons can be: Fixed most common Floating set at a periodic rate over a predetermined benchmark Step-Up coupon steps up at predetermined intervals and predetermined increments PIPER JAFFRAY 26

27 Eligible Investment Details FDIC Insured Certificates of Deposit CD s are insured by the FDIC up to $250,000 per tax ID, per financial institution. THEY OFFER: Strong Credit Quality The FDIC has the explicit guarantee of the U.S. Government same as Treasuries Potentially higher yields many banks aggressively seek deposits and are willing to pay investors well. Invest just under $250,000 to ensure that your accreting coupon payments are also included in the FDIC insured amount. For example, buy $245,000 par amount. PIPER JAFFRAY 27

28 Investment Strategies and Best Practices Developing an Investment Strategy Implementing Your Investment Strategy Maintaining Your Strategy VALUATION PIPER JAFFRAY 28

29 Developing An Investment Strategy Keep it safe. Keep it simple. Safe Protect invested principal Liquid Ensure adequate liquidity to meet operating requirements Yield Generate a market rate of return on investments PIPER JAFFRAY 29

30 Developing An Investment Strategy Safety Adhere to statutes/codes and invest in a balanced portfolio of approved investments. Liquidity Evaluate cash flows and liquid cash needs o Maintain adequate day-to-day liquidity needs in a money market fund or state pool. Determine what amount of funds may be invested Yield Purchase investments that, all else equal, provide an incrementally higher rate of return on your investment. It s about the return OF the money, rather than the return ON the money. PIPER JAFFRAY 30

31 Developing An Investment Strategy BALANCE Establish an Investment Policy Balance maturities o Ladder your portfolio with staggered maturities o Establish amounts to invest in short, intermediate and long-term components of the portfolio. Balance security selection o Attempt to avoid concentrating too many investments in any one fixed income security type or within issuers within that security type. o Use a mix of callable and bullet securities. o Target funding dates with zero-coupon bonds. o Hedge long-term with some floating rate notes. PIPER JAFFRAY 31

32 Implementing Your Investment Strategy INVESTING IN THE FIXED INCOME MARKET Security Selection and purchasing Invest over a period of time Target maturities to fill your laddered portfolio Communicate your investment parameters and objectives to your broker-dealers Use more than one broker-dealer Compare apples to apples when making investment decisions o Ratings o Maturity o Yield to Maturity vs. Yield to Call PIPER JAFFRAY 32

33 Maintaining Your Strategy REINVESTING Stay committed to your strategy through all markets Continue to reinvest with a balanced approach Maintain adequate liquidity Balance security selection Important, and difficult, in very low-interest rate environments and rising rate environments. o There is a temptation to hold-off investing or reinvesting to wait for higher yields. o Cost of waiting opportunity cost of giving up current returns with the hope of higher future returns. PIPER JAFFRAY 33

34 Maintaining Your Strategy Illustrated PIPER JAFFRAY 34

35 Fast Forward to 6/21/17 PIPER JAFFRAY 35

36 Portfolio Maintenance PIPER JAFFRAY 36

53 Closing Thoughts Be mindful of your parameters and your goals Keep it simple Keep it safe. It s all about the return OF the money, rather than the return ON the money. Stay flexible and open to opportunities There is an inherent cost in waiting All considered, maintain a balanced approach PIPER JAFFRAY 53

54 Investing Public Funds Fixed Income Investment Services Piper Jaffray - Portland, OR Questions or Comments? Contact Information: Greg Hagen Managing Director gregory.e.hagen@pjc.com Jeff Legge Managing Director jeff.a.legge@pjc.com Nolan Farr Asst. Vice President nolan.d.farr@pjc.com PIPER JAFFRAY 54

55 Appendix Basic Bond Math The value of a basis point A Look at Basic Bond Pricing & Cash Flow Accrued Interest Rules to Remember Additional Resources

56 Fixed Income Basics: Bonds 101 Basic Bond Math The Value of a Basis Point A Basis Point is 1/100 of a percent (0.01%). o Thus, 50-basis points = 0.50% The Dollar Value of 1-Basis Point on $1 Million: o $1 million invested for 1-year at 0.01% = $ o 1-basis point(bp) on $1 million(mm) for 1-year = $ o 1-basis point(bp) on $1 million(mm) for 6-months = $50.00 PIPER JAFFRAY 56

57 Fixed Income Basics: Bonds 101 Proceeds (Cost) A Typical Bond: 1MM for 2-yrs, Priced at Par ($ per bond) Price Coupon Interest Payments Yield Maturity $1,000,000 $ % $5,000 12/24/2016 6/24/2018 $5,000 6/24/2017 $5,000 12/24/2017 $5,000 6/24/ % $1,000,000 PIPER JAFFRAY 57

58 Fixed Income Basics: Bonds 101 A Typical Bond: 1MM for 2-yrs, Priced at a Discount (Less than $ per bond) Proceeds (Cost) Price Coupon Interest Payments Yield Maturity $980,500 $ % $5,000 12/24/2016 6/24/2018 $5,000 6/24/2017 $5,000 12/24/2017 $5,000 6/24/ % $1,000,000 PIPER JAFFRAY 58

59 Fixed Income Basics: Bonds 101 A Typical Bond: 1MM for 2-yrs, Priced at a Premium (Greater than $ per bond) Proceeds (Cost) Price Coupon Interest Payments Yield Maturity $1,009,940 $ % $5,000 12/24/2016 6/24/2018 $5,000 6/24/2017 $5,000 12/24/2017 $5,000 6/24/ % $1,000,000 PIPER JAFFRAY 59

60 Fixed Income Basics: Bonds 101 Proceeds (Cost) A Security Trading at a Discount Rate: 1MM for 273-Days Price (Discount) Coupon Interest Payments Yield Maturity $996, % $0 NA 0.508% 3/24/17 $1,000,000 T-Bills, Agency Discount Notes, Commercial Paper, and Banker s Acceptances trade at discount rates. Rather than paying a coupon, discounted securities accrete interest over the life of the bond and pay at maturity. PIPER JAFFRAY 60

61 Fixed Income Basics: Bonds 101 ACCRUED INTEREST The interest that has accumulated on a bond since the last interest payment. The seller of a bond expects to receive interest earned by not yet paid on a bond, therefore the buyer pays the accrued interest upon settlement. Examples of Accrued Interest: Purchase Days Since Last Accrued Interest Date: Coupon Due Seller: Coupon Maturity: Payment: : 6/24/ $ % 6/24/2018 7/25/ $ /27/ $3, /25/ $27.78 $ 1,000, PIPER JAFFRAY 61

62 Fixed Income Basics: Bonds 101 RULES TO REMEMBER The value of a bond is the present value of future cash flows. Bond values drop when market interest rates increase, all else equal. Bond values rise when market interest rates decrease, all else equal. Long-term bond values are more sensitive to changes in interest rates than short-term bond values, all else equal. PIPER JAFFRAY 62

63 Additional Resources Vast body of knowledge about fixed income investments Regulatory body, allows you to check your broker, etc. Federal reserve site, with current news, including stimulus plan info, etc. Federal deposit insurance corporation GOVERNMENT SPONSORED ENTITY (GSE S) WEBSITES: PIPER JAFFRAY 63

64 Greg Hagen Managing Director, Fixed Income Services 20 Years of Experience Greg Hagen is a Managing Director in the Fixed Income Services group of Piper Jaffray, serving the institutional investment needs for public entities, money managers, financial institutions, non-profits, and corporations, both public and private. Mr. Hagen began his career in 1995 as an agency and corporate bond trader, identifying specific investment opportunities for the firm s investment clients. After spending 10-years trading taxable fixed income products Mr. Hagen transitioned to serving institutional clients throughout the northwest. Currently, Mr. Hagen and his Portland based team serve institutional investment clients in Oregon, Washington, Idaho, Montana, Nevada, Arizona, California, and Alaska. Over the last 10-years of service, Mr. Hagen and his team have invested more than $36-billion in fixed income investments in nearly 20,000 transactions. The team s specific focus on providing efficient and affordable access to institutional capital markets and world-class analytics and research, coupled with tailored, high-touch service, investment solutions differentiates Piper Jaffray s investment services. In addition to directly serving clients throughout the western United States with his Portland, OR based team, Mr. Hagen also leads Piper Jaffray s nationwide Public Funds Management and Corporate Cash Management team. This team is composed of investment professionals with unique expertise in the stringent public funds and corporate cash management regulatory environment. PIPER JAFFRAY 64

65 About Piper Jaffray Piper Jaffray Companies (NYSE: PJC) has been serving the needs of clients since We are a focused, leading middle market investment bank and institutional securities firm. Piper Jaffray & Co., the firm s principal operating subsidiary, provides a comprehensive set of products and services, including equity and public finance underwriting; mergers and acquisitions; equity and debt capital markets; high-yield and structured products; institutional equity, tax-exempt and taxable sales and trading; and equity and high-yield research. The firm s equity business is focused on seven sectors of the economy: alternative energy, business services, consumer, financial institutions, health care, industrial growth and technology. The firm s public finance business is principally focused on five sectors of the tax-exempt market: state and local governments, real estate and housing, health care, education and hospitality. With headquarters in Minneapolis, Piper Jaffray has approximately 1,000 employees in 25 cities across the United States and in London, and, Hong Kong. PIPER JAFFRAY 65

66 Guiding Principles We create and implement superior financial solutions for our clients. Serving clients is our fundamental purpose. We earn our clients' trust by delivering the best guidance and service. Great people working together as a team are our competitive advantage. As we serve, we are committed to these core values: Always place our clients' interests first Conduct ourselves with integrity and treat others with respect Work in partnership with our clients and each other Maintain a high quality environment that attracts, retains and develops the best people Contribute our talents and resources to serve the communities in which we live and work PIPER JAFFRAY 66

67 Disclosure The material contained herein is not a product of any research department of Piper Jaffray & Co. or any of its affiliates. Nothing herein constitutes a recommendation of any security, nor is it intended to provide information sufficient to make an investment decision. The information provided herein is not intended to be and should not be construed as a recommendation or advice within the meaning of Section 15B of the Securities Exchange Act of The information contained in this communication has been compiled by Piper Jaffray & Co. from sources believed to be reliable, but no representation or warranty, express or implied, is made by Piper Jaffray & Co., its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this communication constitute Piper Jaffray & Co. s judgment as of the date of this communication, are subject to change without notice and are provided in good faith but without legal responsibility. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Nothing in this communication constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and may have been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this communication may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the fullest extent permitted by law neither Piper Jaffray & Co., nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this communication or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Piper Jaffray & Co. Piper Jaffray & Co. has or may have proprietary positions in the securities or in related derivatives that are the subject of this communication. Piper Jaffray & Co. may have been manager or co-manager of a public offering of securities of the issuer within the past twelve months. Additional information is available upon request.