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Execute the Plan

Execute the Plan. February 23, 2006. Presented by: Lauren Brant - Managing Director PFM Asset Management LLC. Preliminary Considerations. Look At Universe of Available Investments. U.S. Government Obligations Federal Agency Obligations Taxable Municipal Obligations

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Execute the Plan

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  1. Execute the Plan February 23, 2006 Presented by: Lauren Brant - Managing Director PFM Asset Management LLC

  2. Preliminary Considerations

  3. Look At Universe of Available Investments • U.S. Government Obligations • Federal Agency Obligations • Taxable Municipal Obligations • Repurchase agreements • Commercial paper • Bankers’ Acceptances • Corporate Notes • Mortgage-Backed Securities • Negotiable Certificates of Deposit • Mutual Funds investing in securities listed above • Money Market Fund • Local Agency Investment Fund (LAIF)

  4. Just as important is ensuring that you have good issuer diversification. UBS Finance Commercial DE Paper U.S. GECC 5% Treasury 5% 10% LAIF U.S. Treasury LAIF 15% 15% 10% 10% Citigroup Corporate 5% 10% FNMA Wells Fargo 20% 5% Federal FHLMC Agency 15% 55% FHLB 20% Ensure Appropriate Diversification • Pay attention to sector diversification prior to placing investments.

  5. Track Corporate Credits • Establish procedures to monitor corporate obligations after initial purchase. Source: Bloomberg

  6. Have a View of the Market

  7. Will Rates Continue to Rise? Bernanke Testimony May Further Invert Yield Curve “Testimony to Congress could push longer-dated yields further below their shorter-dated counterparts” Feb 14, 2006

  8. Current Interest Rates 2-Year U.S. Treasury Note January 1, 2005 – February 10, 2006 Source: Bloomberg

  9. Historical Perspective 2-Year Federal Agency Note January 1, 2001 – February 3, 2006 12/27 Yield Curve Inverts 9/11 Market anticipates beginning of interest rate hikes Yields hit 50-year lows Major Bull Market Bear Market Source: Bloomberg

  10. Yield Curve U.S. Treasury Yield Curve January 1, 2001 vs. December 31, 2001 January 1, 2001 December 31, 2001 Source: Bloomberg

  11. Monetary Policy Fed Funds Target Rate January 2000 – June 2006 7.0% 6.0% 4.50% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- 00 00 01 01 02 02 03 03 04 04 05 05 06 Source: Bloomberg

  12. Tools to Help You Make Good Investment Decisions

  13. How Do You Know Where to Begin? • Tools to help you decide what to do in these uncertain times. • Breakeven analysis • Forward-yield curve • Spread analysis • Option-adjusted spread analysis • Sensitivity analysis (stress test) • Judgment

  14. Selecting the Best Maturity Range • In the current market, should you buy short or long? • Which would you buy? • 6-month Agency @ 4.80% • 1-year Agency @ 4.93% Rates as of February 13, 2006

  15. Breakeven Analysis • Frame the question differently • What rate do you have to earn for the last 6 months to breakeven? 4.93% Time=0 Time=1 year Time=6 months ?? 4.80%

  16. Breakeven Analysis 4.93% for 1 year Time=0 Time=1 year Time=6 months ?? for 6 months 4.80% for 6 months 5.06% 4.93 * 1 year = (4.80 * ½ year) + (x * ½ year) 4.93 = 2.40 + ½ x 2.53 = ½ x 5.06 = x

  17. Breakeven Analysis • Do you think that rates will rise more than 26 basis points in the next 6 months? • If yes, buy the 6-month investment • If no, buy the 1 year 4.93% Time=0 Time=1 year Time=6 months 5.06% 4.80%

  18. Breakeven Analysis • How could you know if rates will rise more than 26 basis points in the next 6 months? • Frame the question differently • There are 3 Fed meetings in the next 6 months. • Is it likely that Fed will raise rates 25 basis points at 1 of the 3 meetings? • If yes, then the 6-month is a good choice. • If no, then the 1-year is a good choice.

  19. Yields Among Various Sectors Rates as of February 15, 2006

  20. 0.70% 0.60% Average 28 basis points 0.50% Spread 0.40% 0.30% 0.20% 0.10% Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Value Between Treasury and Agency Spread Between 2-Year U.S. Treasury and 2-Year Federal Agency January 1, 2001 – February 10, 2006 Source: Bloomberg

  21. Value Between Treasury and Agency2005 to Today Spread Between 2-Year U.S. Treasury and 2-Year Federal Agency January 1, 2005 – February 10, 2006 0.35% Buy Agencies Average 24 basis points 0.31% 0.27% Spread 0.23% 0.19% Buy Treasuries 0.15% Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Source: Bloomberg

  22. Value Between Agency and Corporate Spread Between 2-Year Federal Agency and 2-Year “AA” Corporate January 1, 2001 – February 10, 2006 0.70% 0.60% Average 29 basis points 0.50% 0.40% Spread 0.30% 0.20% 0.10% 0.00% Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Source: Bloomberg

  23. Value Between Agency and Corporate2004 to Today Spread Between 2-Year Federal Agency and 2-Year “AA” Corporate January 1, 2005 – February 10, 2006 0.34% Buy Corporates 0.30% 0.26% 0.22% Spread 0.18% Average 21 basis points 0.14% 0.10% Buy Agencies 0.06% Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Source: Bloomberg

  24. Cost of Liquidity 1-Month Prime Commercial Papervs. LAIF January 1, 2004 – February 3, 2006 5.0% S&P Rated Federal LGIP 3-month Commercial Paper 4.3% 3.5% 2.8% 2.0% 1.3% 0.5% Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 Source: Bloomberg

  25. Primary Versus Secondary Market 9 basis points x $5 mm x 1 Year = $ 4,500 3 basis points x $5 mm x 2 Years = $ 3,000 BROKER’S FEE FOR THE NEW ISSUE = $7,500 Rates as of February 14, 2006

  26. Competitive Shopping Adds Value • Sample Trade, BUY: • FNMA, coupon 3.125%, December 15, 2007, par $2,000,000 Offered Offered Difference Over Broker Yield Price Principal Low Price Broker A 3.40% 99.221 $1,984,426 $4,503 Broker B 3.42% 99.165 $1,983,299 $3,377 Broker C 3.44% 99.109 $1,982,173 $2,250 Broker D 3.46% 99.052 $1,981,047 $1,125 Broker E 3.48% 99.996 $1,979,922 $0

  27. Implementation Timeline 2-Year U.S. Treasury Note January 1, 2005 – February 10, 2006 Source: Bloomberg

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