Miami-Dade County invests very short term awaiting rate hike

Miami-Dade County government is investing its assets primarily in short-term securities today while yields are low, expecting higher yield opportunities to emerge in six to seven months as the Federal Reserve ratchets up interest rates.

The county’s investment portfolio took a big income hit in the low-rate environment of the past fiscal year, earning less than 14% of what it had earned the year before.

That portfolio earned $10.857 million for the fiscal year ended in September, an average return of 0.15%. At that time, 180-day US Government Treasuries paid a return of 0.08% while the Florida Prime had a 0.15% return.

In 2020, the previous fiscal year, the county’s portfolio return was 1.20% while the 180-day U.S. Government Treasuries reported 1.14% and the Florida Prime 1.17%.

The portfolio of the county had an actual interest earned in 2021 of $10.8 million while in 2020 it had $79.8 million.

“The portfolio’s interest earnings have decreased by 86.4% or $69.002 million,” says a report by the financial division of the county. “This decrease from the previous fiscal year was due to the Federal Reserve’s decision to lower interest rates in order to accommodate the economy during the pandemic.”

Edward Marquez, county chief financial officer, told Miami Today that there have been times in the past where the county earned significantly higher returns, but while the county was earning more on its investments it was paying much more on debt.

“So, there’s a little bit of a tradeoff there, and at the end of the day, we achieve market rates for the structure of our portfolio, and the structure of our portfolio is conservative and consistent with state law,” he said.

The county has two primary objectives: safety and liquidity, Christopher Hill, director of the Finance Cash Management Division, told the newspaper. Also, the investment policies of the county are crafted around returns, which takes a back seat to safety and liquidity.

“We invest in very safe instruments, which really means we invest the majority of the funds in fixed-income investments like bonds, and those are very susceptible to fluctuations in interest rates,” Mr. Hill said.

At the beginning of the pandemic, in March 2020, the Federal Reserve effectively lowered interest rates to zero to stimulate the economy. “The holdings we have are very susceptible to interest rates, and when the Feds lowered it to zero it really lowered our earnings,” Mr. Hill said.

For 2022 there’s not much county officials can do to prevent a significant decrease in earnings again. “We are totally dependent on the marketplace,” Mr. Marquez said. “The Feds, they don’t control the marketplace, but they have a lot of input through their monetary policies, how much cash is in the economy.”

Inflation is expected to increase over time, and when inflation rises, the Federal Reserve generally tightens money, which causes interest rates to go up, Mr. Marquez said. “When that occurs, no one knows. These have been very strange times that we’ve been through, but the Fed has been indicating that is anticipating restricting cash in the marketplace.”

Interest rates are expected to increase this year, both Mr. Marquez and Mr. Hill agreed. “They’ve indicated they’ll raise maybe as much as three times this year and a similar amount next year, and even in 2024,” Mr. Hill said. “Whether that happens or not, it always depends on what happens in the economy. But it looks like for now, as of now, they’re intending to raise rates later this year.”

In December the Federal Reserve predicted the central bank’s benchmark interest rate will rise to 0.9% in 2022, up from the 0.3% expectation from September.

In 2021 the county positioned maturities to be shorter. “If we buy an investment, we’ll position it so it matures more or less when we think the rates will start going up,” Mr. Hill said, noting that nobody knows when interest rates will rise.

“We try to not invest very far out in this low-interest-rate environment, because then you lock in the lower interest rate,” Mr. Hill said. “So our portfolio is a little bit shorter now in anticipation that rates are going to go up, and when our securities mature we’ll take advantage of the higher interest rate that will exist when they mature, hopefully in maybe six months, seven months.”