O.C. to Fed: Raise Rates--Please!

With its massive portfolio of long-term bonds, Orange County’s bankrupt investment fund had much to lose in late December and early January had market interest rates continued to rise. But now that the bonds are sold, the fund’s investors have plenty to gain from a new surge in rates.

That’s because the remaining $5.9 billion in the fund is invested exclusively in very short-term money market securities. Salomon Bros., the county’s adviser, has structured the portfolio so that it in effect rolls over every 10 days. Thus the fund’s interest earnings would climb rapidly if short-term interest rates were to jump.

Until last week, Wall Street had been hopeful that the Federal Reserve Board might defer raising short rates another notch when the central bank meets on Jan. 31. But the latest economic statistics suggest still-strong growth and rising inflation pressures, renewing speculation that the Fed will boost rates aggressively.

The average annualized yield on the Orange County pool now is 5.4%, according to Salomon. On a $5.9-billion portfolio, that yield means $319 million in annual interest earnings. For every 1-point rise in rates from here, the pool would earn about $59 million more in annual interest--a tidy sum for the county and other pool investors struggling to make ends meet this year.

Of course, higher rates also could hurt the county by slowing the economy (and thus tax revenue) and by raising the cost of future borrowings. But near-term, a tighter Fed would be a friend to Orange County.