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'Not a fun day' for treasurer's office investors

Posted January 22, 2008 10:00 pm

Adriana Colindres

The uncertainty in world markets has created a ripple effect that reached early Tuesday into a third-floor room in a state government office building on Jefferson Street.

That's where a handful of state Treasurer Alexi Giannoulias' employees trade and invest billions of dollars on behalf of local governments and the state's general fund portfolio.

In that room, the busiest part of every weekday happens during the first 20 or 30 minutes, starting promptly at 7 a.m.

By 7:30 a.m. Tuesday, for instance, the employees had invested $6.6 billion by trading U.S. Treasury repurchase agreements and U.S. government agency repurchase agreements.

"We just spent more money than most people will in their entire lives," said Mark Polistina, portfolio manager for the treasurer's office. "I shouldn't say 'spent.' We invested it."

He, Sue Roth and Garry Dierkes shared the duties of making a flurry of phone calls, tapping on computer keyboards and saying things like: "Ninety-five. You're on the board."

"I don't expect today to be a very fun day," Polistina said just before 7 a.m.

Later, he explained that he meant he didn't think rates for U.S. Treasury securities would be very good on Tuesday. And they weren't.

His prediction was based in part on the knowledge that foreign equity markets, especially in Asia, had dropped between 5 percent and 8 percent overnight.

"When people perceive issues in the economy ... people flock to U.S. treasuries," he said. "They buy quality. The highest-quality security you can own is a U.S. Treasury."

As demand increases for U.S. Treasury securities, their yield decreases, Polistina said.

Yield on a two-year Treasury note, for instance, dropped 25 basis points from Friday's close to Tuesday morning, when it was 2.10 percent. A year ago, yield on a two-year Treasury note was 4.91 percent.

Such declining numbers translate into lower earnings on investments for local governments, which pool their money into short-term investments called The Illinois Funds, and for the state's general fund portfolio.

Governments use their investment earnings for a variety of purposes, such as improving schools and transportation.

"There are going to be drops in the rates that we're able to get from the marketplace, and we want to make sure we're doing everything we can," Giannoulias said in an interview later Tuesday.

"It's tough for us to control the market. But we're going to keep on being safe, liquid and as aggressive as possible," he said, adding that the three priorities are in that order, with "safe" topping the list.

Shortly after Tuesday's early-morning trading session ended, Polistina read - on a big-screen TV tuned to the CNBC channel and on a computer - that the Federal Reserve had cut a key interest rate by 0.75 percent.

"What we saw today was the biggest cut since 1984," Giannoulias said later.

"That's going to have a significant impact on our investments and our revenue going forward, so it is a concern."

Adriana Colindres can be reached at (217) 782-6292.

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