Treasurer cites investment challenges in interest-earnings dip of $5.1M
The state treasury’s interest earnings dipped by $5.1 million in the quarter that ended Dec. 31 to $23.4 million from the same quarter in 2018 during investment challenges posed by dropping interest rates,
Treasurer Dennis Milligan told the state Board of Finance on Tuesday.
While last quarter’s earnings declined from 2018 figures, they exceeded the treasury’s earnings in the same quarter during the three previous years, Milligan noted. The treasury’s investment portfolio totaled $4.6 billion as of Dec. 31.
During the first six months of fiscal 2020, the treasury’s interest earnings totaled $46.1 million, a decline from $53.9 million in the same period in fiscal 2019. However, in the first half of fiscal 2018, interest earnings were $35.6 million, Milligan said. Fiscal 2020 started July 1.
“We are trending roughly in between where we were at this time in fiscal year 2018 and fiscal year 2019 and I would say we are holding our own,” said the Republican from Benton.
The treasury’s weighted average investment return for the first half of fiscal 2020 was 2.12%, Milligan spokesman Stacy Peterson said after the board meeting.
In August, the finance board set a goal of a 2% return on investments in fiscal 2020, a dip from the previous fiscal year’s target of 2.5%. The change was based on the recommendation of board Chairman Larry Walther, who said, “The market is changing.”
At that time, the board also heard from two consultants,
hired by the treasurer’s office, that the treasury issued between $600 million and $1.5 billion in commercial paper to two single issuers.
They recommended tighter restrictions on such investments and the board adopted these limits. Milligan told the finance board that the treasury no longer has “a high concentration level” in commercial paper.
“As you are aware, but perhaps the public might not be, we are limited by statute to investing in only fixed-income securities,” Milligan told the finance board Tuesday. “Fixed-income allows us to meet the objectives set forth by the board of safety, liquidity and return, while ensuring a stable and steady income source for the state.”
Milligan said the Federal Open Market Committee is “currently holding interest rates steady and providing a lot of liquidity, which would normally lead to economic stability.
“However, amid the impeachment hearings [for President Donald Trump], the tension between the U.S. and Iran, as well as other current geopolitical events, investors are really on guard,” he said. “Bond yields are lower and the treasury yield curve for the foreseeable future is absolutely flat.
“At the same time, we are rebalancing our portfolio to a broader asset allocation, based upon the recommendations of the investment panel, and even local banks here in Arkansas attributed low to minor growth in revenue performance to lower federal interest rates,” Milligan said. “All these things have affected our receipted earnings.”
He said the treasury’s shortterm portfolio earned about $10 million in the quarter that ended Dec. 31 and that’s less than the $16.5 million earned in the same quarter a year ago, but higher than the $8.5 million earned in the same quarter two years ago.
The treasury’s short-term portfolio is made up primarily of commercial paper, demand and money market accounts. The short-term portfolio makes up roughly 40% of the total investment portfolio, Peterson said later.
He said the treasury’s longterm portfolio earned about $13.3 million in the quarter that ended Dec. 31, and that’s higher than the $11.9 million in the same quarter a year ago. The portfolio earned about $8.5 million in the same quarter two years ago.
The long-term portfolio is comprised primarily of mortgage-backed securities and collateralized mortgage obligations, and makes up roughly 60% of the total investment portfolio, Peterson said later.
“We continue to struggle with low-yield returns tied to past investments in the collateralized mortgage obligations or CMOs,” Milligan said. “Those CMOs, approximately 30% of our total portfolio, were purchased at a premium and were based upon an assumption that interest rates were going to continue to climb. Unfortunately, the rates have since declined.
“That’s roughly $1.5 billion that we have seen a steady decline in yield, as mortgages continue to increase, people refinance their homes at lower rates,” Milligan added.
“If the Federal Reserve and the market continue to hold rates steady, we believe we may be able to work the treasury out of these investments over the next 18 months,” he said. “For now, we are working out what we can as opportunities present themselves.”