Hartford, CT – On February 1, 2022, Connecticut State Treasurer Shawn T. Wooden transmitted the Cash and Bonding Report for the month of December 2021 with updates as of January 29, 2022, to the Governor and General Assembly. The Report highlights Connecticut’s continued strong cash position during the pandemic. Additionally, the Treasurer shares his perspective on the capital markets and planned bond issuances for the remainder of the fiscal year.
Cash Position
As of January 29, 2022, the state’s overall available cash is at an all-time high at $12.3 billion, and the common cash pool is at $9.9 billion.
“Notwithstanding challenges from rising inflation costs across the nation and Connecticut moving past last month’s COVID-19 surge from the highly transmissible Omicron variant, Connecticut’s economic recovery and fiscal health continue to improve,” said State Treasurer Shawn T. Wooden. “The State’s overall available cash is at an historic high, $12.3 billion and the new projected surplus for fiscal year 2022 is now $1.48 billion, up $571.4 million from last month’s forecast. This gives us the potential to continue to responsibly pay down Connecticut’s pension liabilities at an accelerated rate for the third consecutive year.
During the course of December, the assets of the Short-Term Investment Fund increased from $12.2 billion to $14 billion, reflecting balance increases in state accounts as well as municipal accounts. Additionally, in December, the state’s Department of Labor reported that the unemployment rate dropped from 6% to 5.8% and that Connecticut employers added 600 jobs, displaying the underlying strength of our economic recovery.
Connecticut’s improved fiscal standing is bringing long-term benefits to the state’s finances but it’s clear that high inflation rates continue to impact thousands of Connecticut families. I am hopeful that state leaders, including the Legislature, put forth smart family-friendly economic policies this session to continue to help address an uneven economic recovery.”
The state’s common cash pool contains the operating cash in many funds and accounts. The cash is pooled in order to make the most effective and efficient use of aggregate balances and to allow positive balances in one fund to temporarily offset negative balances in other funds. Bank balances are consolidated daily. Funds that are not projected to be immediately needed to fund disbursements are collectively managed in various short-term investments or bank accounts that earn interest to successfully meet projected cash flows. No temporary transfers from bond proceeds investment accounts have been made since December 2017.
Capital Markets
Over the prior months, we’ve been focused on the Federal Reserve Bank’s decisions with respect to a potential shift in monetary policy. During the past month, the market has been trying to discern the path the Federal Reserve might take and what the resultant impact might be on the economy and the various asset classes. On January 26, 2022, the Federal Reserve announced its intentions at the end of their Federal Open Market Committee (“FOMC”) policy meeting. In the FOMC statement, they said “With inflation well above two percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the Federal Funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.” Essentially, the Federal Reserve will finish pulling the quantitative easing lever by ending the purchase of securities for their balance sheet and beginning to pull the Federal Funds rate lever.
The market has, as previously noted, been adjusting expectations on the path of interest rates through interest rate futures and forward interest rate markets. Currently, the Federal Funds futures market is pricing in three increases in the Federal Funds rate by the end of Connecticut’s fiscal year and nearly five increases in this rate by the end of calendar year 2022. Similarly, Eurodollars (U.S. deposits at foreign banks, and a very liquid interest rate series) also forecast three rate increases during the remainder of the state’s fiscal year and nearly five increases for the calendar year. These forecasts have increased over the last month by one hike and three hikes over the fiscal and calendar year, respectively.
Inflation continues to be a cause for concern for the Federal Reserve as well as the capital markets. Inflation, as measured by the Consumer Price Index (“CPI”, year-over-year change) was reported at 7.0 percent in January, up from the prior month’s 6.8 percent. Excluding the volatile food and energy components, CPI was reported at 5.5 percent, up from the 4.9 percent reported a month earlier. Another gauge of prices, the Personal Consumption Expenditures (“PCE”, year-over-year change) was reported at 5.7 percent, up from the prior month’s revised 5.1 percent.
As capital market participants have changed their assumptions on the path of interest rates, the various asset classes within the capital markets have begun to reflect these changes and the impact higher interest rates will have upon the various asset classes. During the month, the yield on the ten-year U.S. Treasury yield increased by nearly 26 basis points (0.26 percent), which contributed to the decline in the Bloomberg US Aggregate Bond Index of 2.13 percent. The market also revalued risk assets, causing equities to decline. U.S. equities, as measured by the Russell 3000 index, declined by 6.06 percent during the month and global equities, as measured by the MSCI All Country World Index, declined 6.93 percent during the month.
Periodic returns of the various asset classes:
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