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•The fourth quarter was dominated by the U.S. presidential election – first by general uncertainty, then more <br />significantly by the surprising Trump victory. Yields surged in the post-election period as expectations for U.S. <br />economic growth and inflationary expectations rose, and in anticipation of a December FOMC rate hike. <br />•Federal agency yield spreads continued to tighten over the quarter, erasing much of the value seen off and on during <br />the year. The few agency purchases for the City were generally new issues that came to market with yield concessions <br />that offered more reasonable value. <br />•We generally maintained the City’s allocation to the corporate sector as valuations remained fair amid tight yield spread <br />levels. The sector once again outperformed comparable-maturity Treasuries during the quarter, finishing its strongest <br />year of relative performance since 2012. <br />•Significant mandated reforms to the money market fund industry took effect in the fourth quarter. The reforms <br />caused significant changes in the supply/demand dynamic in the short-term markets as nearly $1 trillion in assets <br />shifted from “prime” funds that invest in credit instruments, into government funds, that hold only government <br />securities. The result was increased demand for – and thus lower yields on – short-term government securities and <br />reduced demand for – and thus higher yields on – short-term credit instruments, like commercial paper and bank <br />certificates of deposit. This created excellent investment opportunities in short-term credit instruments. <br />© PFM Asset Management LLC <br />REDWOOD CITY <br />For the Quarter Ended December 31, 2016 <br />Strategy Recap <br />Fourth Quarter 2016 –PFMAM’s Strategy Recap <br />66.1.A. - Page 12