Quarterly Investment Report: First Quarter, 2025

• This report is for City Council information only and requires no action by City Council.
• The investment of City funds is guided by and this report is submitted in compliance with the City’s Investment Ordinance. (Chapter 2-10, Investment of City Funds, Boulder Revised Code 1981).
• The investment objectives as specified in the Ordinance are:
  • The primary objective is preservation and protection of capital. This objective reduces the risk to which the portfolio can be subjected. To comply with this objective investments are diversified by type and maturity horizons.
  • The second objective is to maintain adequate liquidity to meet the daily cash needs of the City. The City’s Ordinance requires that 5% of the portfolio matures within 30 days.
  • Yield is the third objective. The City strives to maximize return while minimizing the risks of the market.

• Tariffs and trade wars: US trade and tariff policies influenced markets substantially in the first quarter. The magnitude and variability of the policies, along with the likely responses from global trading partners, add significant uncertainty to the outlook.
  • The Fed remained on hold: The Federal Open Market Committee did not change the Fed funds target rate this quarter, and the rate is in a range of 4.25%-4.50%. The central bank’s quarterly summary of economic projections released in March reflected higher inflation and lower growth forecasts for 2025, with tariffs a major factor. At that time, the Committee continued to forecast 50 basis points of rate decreases this year.
    • Interest rates decreased across the yield curve: Interest rate volatility was elevated during the first quarter. Two-year Treasury yields ended the quarter at 3.88%, 36bp lower over the quarter. At the longer end of the curve, 30-year yields ended the quarter at 4.57%, 21bp lower.
    • Credit spreads widened: Aggregate credit spreads widened in Q1, with the spread of the Bloomberg US Corporate Index ending 14bp higher over the quarter.
    • The S&P 500 Index lost ground: Equity markets declined over the quarter, with the S&P 500 Index falling by 4.3%. This intensified after quarter end as the new US trade regime raised recession concerns, with mega-cap tech stocks leading the fall.
    • Risks include:
      Fiscal and trade policies increase growth and inflation uncertainty.
      A global trade war pushes the world into recession.
      Geopolitical risks remain elevated.

US Treasury Yields

• Portfolio strategies implemented this quarter and the investments held in the portfolio comply with the City’s investment objectives and the Ordinance that specifies allowable investments.
  • The objective of safety is achieved through a well-diversified portfolio invested primarily in US Treasury and Agency securities of various maturities. In March 2017 the City Council approved amendments to the Investment Policy proposed by finance staff expanding opportunities to further diversify the portfolio. Pursuit of further diversification through the revised policies is progressing strategically relative to market conditions. Market risk is managed by maintaining a moderate weighted average final maturity (WAM) in the City’s portfolio. As of March 31, 2025, the WAM of the operating portfolio is 2.12 years while the Ordinance allows for a WAM of up to 5 years.
  • The City maintains sufficient liquidity. A minimum of 5% of the City’s total portfolio is held in liquidity accounts.
  • As of March 31, the weighted average purchase yield for the operating portfolio holdings 4.01%. The yield benchmark is the six-month trailing average of the yield on the 2-year Treasury note, which is 4.16% as of March 31. The purchase yield on the operating portfolio as of March 31 trails the benchmark yield by 0.15%.
  • For the first quarter 2025, the fair value periodic return on the operating portfolio is 1.81%. The 1-3 Treasury Index return for the period is 1.59%. The periodic return on the operating portfolio for the first quarter is 0.22% higher than the 1-3 Treasury Index return.
• The City’s portfolio does not hold any investments in the following: fossil fuels inclusive of pipeline construction and extraction; firearms or weapons not used in national defense; tobacco companies; and firms related to mass incarceration/private prisons/detention centers.
• In the first quarter 2025, the City’s investment advisor invested approximately $42 million in long-term securities for the operating portfolio. Purchases included US Treasury and Agency securities and a corporate bond. The weighted average purchase yield of these investments is 4.29% and the weighted average maturity at the time of purchase is 3.5 years.
• The portfolio duration maintains exposure to longer-term interest rates and the portfolio is well diversified to various market sectors which may enhance the portfolio’s return over time.

Summary of Portfolio Characteristics

Asset Allocation and Effective Duration

Final Maturity Distribution

Portfolio Holdings as of March 31, 2025

The City’s investment framework includes considering socially responsible investment factors. The City’s SRI program intends to allow the City to better achieve its sustainability and resilience goals, remain financially strong and better align community values. The program incorporates the strategies described below.

Exclusionary Screening

Exclusionary screening, or negative screening, is the process of excluding from investment certain sectors or companies involved in activities which are unacceptable or controversial. Investments for the City’s portfolio exclude the following sectors:

• Fossil fuels inclusive of pipeline construction and extraction
• Firearms or weapons not used in national defense
• Tobacco companies
• Firms related to mass incarceration/private prisons/detention centers

Included in these negative screens is the prohibition of financial firms associated with pipeline construction. The City has further applied this limitation on financial firms to the group of broker/dealers through which investments may be transacted and the City has taken steps to remove any money market funds or cash pools that invest in the above sectors.

Positive Screening and Impact Investing

Positive screening and impact investing consider the impact that an investment is making. Implementation of this strategy is illustrated by the investment in a municipal bond issued for the construction and management of affordable housing. Other potential impact investing opportunities include investing in securities issued by the World Bank, which is an approved asset class per the City’s investment policy.

Environmental, Social and Governance (ESG) Integration

The City’s goal is to bring ESG integration to the heart of the investment decision process. The City monitors the ESG ratings provided by MSCI for the corporate bonds in the portfolio. The MSCI ratings are provided on a scale of 1 to 10 with ten being the highest. At this time, the weighted average Industry-Adjusted Score from MSCI for the corporate bond holdings is 7.0 which maps to a letter rated of “A” on a scale of triple-C to triple-A.

The City also monitors the unadjusted Pillar Scores from MSCI for the corporate holdings. At this time, the weighted average Pillar Scores for the corporate bond holdings are as follows:

• MSCI Environmental Pillar Score: 6.3
• MSCI Social Pillar Score: 5.2
• MSCI Governance Pillar Score: 5.4

The City’s ESG model can be refined to reflect the issues that matter most to the citizens of Boulder by applying customized weights to the MSCI Pillar Scores, thus creating ESG scores that better reflect the City’s values, goals and policies.

Active Ownership/Corporate Engagement

Corporate engagement involves discussions with issuers about ESG risks and opportunities. The City is partnering with Insight Investment to seek the benefits of this goal. Insight requests and participates in meetings with management to understand key risks and potentially influence outcomes. Company engagement is critical to Insight’s credit process and their analysts meet with issuers to address ESG factors as well as other credit-related concerns or questions.