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Investment Strategies for the Treasury Officer North Carolina Local Government Investment Officers February 2007 : 

Investment Strategies for the Treasury Officer North Carolina Local Government Investment Officers February 2007 Sharon L. Stark Managing Director, Chief Market Strategist Stifel, Nicolaus & Company, Incorporated. ﴀRefer to page 17 of this report for Stifel Nicolaus Fixed Income Capital Markets disclosures and analyst certifications. Stifel, Nicolaus & Company, Incorporated Member NYSE / SIPC


Topics Assess current market conditions and outlook. Key performance factors in investment management. Evaluate investment strategies under various yield curve scenarios. Identify cross-sector relative value opportunities.

Overview of Market Conditions: 

Overview of Market Conditions U.S. Treasury Yield Curve Source: Bloomberg L.P.

Forward Rates Predict Lower Short-Term Yields and Steeper Curve: 

Forward Rates Predict Lower Short-Term Yields and Steeper Curve


Yield/Spread Trends Source: Bloomberg L.P.

Portfolio Management Tools : 

Portfolio Management Tools Coupon---Interest earned. Yield---Earnings on an investment assuming interest is reinvested at same yield. Duration--% change in price when interest rates change by 100 bps.

Yield Curve Scenarios and Portfolio Strategies: 

Yield Curve Scenarios and Portfolio Strategies Inversion (short-term rates increase relative to long-term rates). Strategy: short duration and barbell curve positioning. Bear Steepener (long-term rates increase relative to short-term rates). Strategy: short duration and bullet curve positioning. Bull Steepener (short-term rates decrease relative to long-term rates). Strategy: long duration and bullet curve positioning.


Inversion Short-term yields continue to exceed long-term rates. Inversion usually foretells economic recession or slowdown. Short maturity assets---current income; Long term assets for price appreciation.

Bear Steepner: 

Bear Steepner Fed raises short rates to contain inflation. Long term rates rising as inflation accelerates. Stay short to minimize price depreciation and maximize yield.

Bull Steepner: 

Bull Steepner Short term yields fall faster than long term. Overall yields fall as Fed cuts rates to reflate economy. Lengthen portfolio duration to capture higher yields and price appreciation.

Yield Curve Strategy Performance Analysis: 

Yield Curve Strategy Performance Analysis

Suggested Strategies: 

Suggested Strategies Diversify yield curve exposure; avoid overloading the short duration sector. To prepare for a steeper curve, focus on products in the intermediate sector of your permissible investment universe. Add incremental yield to the portfolio through short duration mortgage securities. Consider bond swaps to upgrade the risk/reward profile of the portfolio.

Agency Sector: 

Agency Sector Bonds with longer lockout periods and less frequent call. Investors should sacrifice yield for call protection when rates are relatively high and expected to fall.

Treasury Relative Value: 

Treasury Relative Value Treasuries appear attractive for the front duration sector, while Agencies offer better value further out on the yield curve. Over the past 20 years, the 3-month Treasury yield has exceeded 2-year Treasury yield by more than 13 bps only 5% of the time.

Short Duration Mortgages – Relative Value: 

Short Duration Mortgages – Relative Value If permissible by investment policy, mortgage securities may be considered to diversify the portfolio, enhance income, and improve total return performance . Representative offerings in the 0-3 year duration sector: 4.5% Balloon Mortgage Pass Through 2.16yr Sept-10 5.43% +48bps FHLB Indexed Amortizing Note 4.0yr Oct-13 5.64% +75bps Sequential Pay/CMO 3.37yr Dec-13 5.57% +67bps Source: Stifel Nicolaus Fixed Income Trading Desk as of 1/29/2007. Yield Spread to Treasury Curve Maturity Security Type WAL

What Have we Learned?: 

What Have we Learned? Determine a rate outlook. Set income or return goals. Monitor risk factors such as duration in different rate scenarios. Plot a strategy; perform a what if analysis. Look for relative value in the market as opposed to one security.


  Additional information is available upon request. Stifel, Nicolaus & Company, Incorporated makes a market in the aforementioned securities as of the date of issuance of this research presentation as noted on page 1 of this handout. Stifel, Nicolaus & Company, Incorporated has managed or co-managed a public debt offering for FannieMae, FreddieMac, the FHLB and/or the FFCB within the past 12 months. Stifel, Nicolaus & Company, Incorporated has received compensation in the past twelve months, or expects to receive compensation in the next three months, for investment banking services from one or more of the borrowers mentioned in this presentation. The Fixed Income Capital Markets trading area of Stifel, Nicolaus & Company, Incorporated owns debt securities of the borrower or borrowers mentioned in this presentation. The information contained herein has been prepared from sources believed reliable but is not guaranteed by Stifel, Nicolaus & Company, Incorporated and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of investors. Employees of Stifel Nicolaus or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. No investments or services mentioned are available to “private customers” in the European Economic Area or to anyone in Canada other than a “Designated Institution”. Stifel Nicolaus and/or its employees involved in the preparation or the issuance of this communication may have positions in the securities or options of the issuer/s discussed or recommended herein. Securities identified herein are subject to availability and changes in price.   Readers of this report should assume that Stifel Nicolaus or one of its affiliates is seeking or will seek investment banking and/or other business relationships with the issuer or issuers, or borrower or borrowers, mentioned in this report. Stifel Nicolaus’ Fixed Income Capital Markets research and strategy analysts (“FICM Analysts”) are not compensated directly or indirectly based on specific investment banking services transactions with the borrower or borrowers mentioned in this report or on FICM Analyst specific recommendations or views (whether or not contained in this or any other Stifel Nicolaus report), nor are FICM Analysts supervised by Stifel Nicolaus investment banking personnel; FICM Analysts receive compensation, however, based on the profitability of both Stifel Nicolaus (which includes investment banking) and Stifel Nicolaus’ Fixed Income Capital Markets. The views, if any, expressed by FICM Analysts herein accurately reflect their personal professional views about subject securities and borrowers. For additional information on investment risks (including, but not limited to, market risks, credit ratings and specific securities provisions), contact your Stifel Nicolaus financial advisor or salesperson. I, Sharon L. Stark, certify that the views expressed in this presentation accurately reflect my personal views about the subject securities or issuers; and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this presentation. Disclosures