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Bank managing Casper’s $134.5M portfolio recommends city start investing in corporate bonds

(File Photo, Oil City)

CASPER, Wyo. — The City of Casper has an investment portfolio managed by First Interstate Bank that totaled about $134.5 million as of July.

While investments have only been made in government-issued bonds, the city is considering changing its investment policy to start investing in corporate bonds. Staff have communicated with state officials and have reached the conclusion the city can legally invest in corporate bonds if it should choose to do to, City Manager Carter Napier told the City Council on Tuesday.

The investment policy of the State Land and Investment Board allows municipalities to invest in corporate bonds, a memo from Jill Johnson, financial services director for the city, said. Johnson told the City Council on Tuesday that a proposed new investment policy would include measures that are a little more restrictive than what the SLIB policy would allow.

Investing in corporate bonds should result in increased returns for the city, Paul McKean, portfolio manager with First Interstate Bank, told the City Council. He said high-grade corporate bonds have typically resulted in at least 1% greater returns than U.S. Treasury bonds.

Corporate bonds do present some different risks compared with government-issued bonds, McKean noted. As bonds are essentially a way that an investor loans money, there is the potential a corporation might not pay back what is borrowed, he said.

Protections against this under the proposed policy for the city would include limiting investments to only high-grade bonds with at least an “A” rating. McKean said that bond-rating agencies issue ratings up to “AAA”. Bonds rated as “BBB” are considered “investment-grade” and as “A” is a higher rating than this, McKean said this should offer some confidence in the investment of city funds.

In addition to considering the investment ratings, McKean said First Interstate Bank does its own research on companies before investing money it manages for entities like the city into bonds associated with that company.

The city’s proposed investment policy would also limit investment in corporate bonds to a maximum average maturity of five years.

In addition, the maximum amount that could be invested in corporate bonds would be limited to 20% of the city’s overall investment portfolio. The maximum amount that could be invested into bonds from any single issuer would be limited to 1% of the overall investment portfolio.

In July 2022, corporate bonds yielded about 1.5% more returns than U.S. Treasury bonds, Johnson’s memo said. If the maximum 20% of the city’s $134.5 million investment portfolio were to be invested in corporate bonds instead of U.S. Treasury bonds and the city were to see an increased return on investment of 1.5%, that would result in over $400,000 in additional investment earnings for the city in a year.

On Tuesday, the City Council indicated its support for the new investment policy. The council will be asked to formally authorize the city to invest in corporate bonds during a regular meeting.

The question about corporate bonds is separate from a question about local government investments that Wyoming voters will be asked to weigh in on during the General Election. Voters will be asked to consider an amendment to the Wyoming Constitution that would allow counties and municipalities to invest in stocks/equities. Details regarding that question are available in this article.

Johnson’s full memo discussing the city’s proposed new investment policy can be reviewed as follows: