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County of Ventura April2.9 21315 Pap2of3 The Investment Work Group continued the temporary suspension of purchases of investment instruments of European banks, and continued its minimization of purchases of Yankee CD's from the four Canadian banks on our approved lists. The European news seems to be favorable and there have been no significant downgrades in February or earty March. The Canadian banks are still going through their penodic "stress test" procedures. Speaking generally, I have noticed some diminishment in the quantity of short-term market issuers as some issuers have completely exited the market and others have reduced their issuances because they do not need to borrow. The Ventura County investment fund is a fixed-income, interest -rate -sensitive portfolio with no direct exposure to equities; commodities or global markets. Accordingly, this report will more specifically focus on factors related to U.S. interest rates. I write this report in mid-March_ for delivery on 21 April. The short-term interest rate market in the United. States is dependent on the actions of the Federal Open Market Committee. The most recent report of the FOMC suggests its intent to allow interest rates to rise in mid - 2015, based on what appear to be favorable employment reports and low inflation estimates. The FOMC perceives the national economy as having gained strength, but with some cautions based on relatively high rates of non -participation in the labor force, slow growth in consumer spending and the likely rebound in oil prices Commentators suggest that the Fed's statements show a 2 -meeting time frame for notice of a rate increase, which points to a summer 2095 "lift-off." This conclusion is based on the Delphic statements from the Fed suggesting that rate relaxation will not occur until two meetings after the word "patience" is removed from the meeting notes_ The Fed has not offered any dues about whether the "lift-off"will will be gradual like a space shuttle launch or rapid like the firing of an anti-aircraft missile. Commentators lean toward a gradual rate of increase, starting at 25 basis points, with the most visible increases in the 2- to 5 -year segment of the yield curve. The market has already begun pricing -in the anticipated increase. Yields have generally been rising for two -and -three-year instruments, to over 1 % annualized for both callable and non -callable Treasury and agency issues. However, the market is volatile because of the uncertainty caused by the present international trend toward central banks reducing interest rates in an effort to enhance their countries' economic recovery. Recently a 5 -year German treasury bond issue was sold at a negative yield, for example. If that trend continues, US Treasuries and agencies will be more attractive; their prices will rise. and their yields will fall. This has already occurred in late January and February. l regard this as a particularly good time to stay short, liquid, and conservative, well within the boundaries of our Statement of investment Policy, Size matters. Up to a still -distant point, the investment fund can grow larger without incurring significant additional costs, especially if we add participants that do not intend to use the fund as a checking account. A larger fund allows the Investment Work Group to more often consider taking whole issuances of municipal bonds, for example; or to more often invite federal agencies to issue bonds tailored directly to our fund's needs. [ am reaching out to eligible local agencies that are not presently fund participants to remind