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For the Quarter Ended December 31, 2016 <br />Outlook and Strategy <br />Fourth Quarter 2016 –PFMAM’s Outlook and Strategy <br />•Although we enter 2017 with a high degree of political uncertainty, our expectations are for a modest uptick in <br />economic growth in the U.S., a trend toward higher inflation, and a continued, but gradual upward trajectory of <br />interest rates. <br />•Rising interest rates ultimately result in higher earning potential for the City, but negatively affect the market value of <br />current holdings. As always occurs in periods of rising rates, our active management approach, which seeks to <br />maximize long term returns, may result in the realization of short-term losses. This is in contrast to the gains realized <br />over the past several years, which resulted from generally declining rates. <br />•We will continue to evaluate opportunities in the agency MBS sector, purchasing those issues we believe are well <br />structured, offer adequate yield spreads, and which have limited duration variability. <br />•Agency yield spreads over Treasuries remain narrow. As a result, our strategy will generally favor U.S. Treasuries over <br />agencies, unless specific issues offer identifiable value. <br />•The por tfolio will continue to be to transitioned to its 1-5 year strategy, eventually targeting a duration and maturity <br />distribution generally in line with the distribution of the benchmark, except where shifting to short-term credit <br />securities offers better value. <br />•We will continue to monitor incoming economic data, Fed policy, and market relationships, adjusting the portfolio <br />position as needed. This will include monitoring and assessing the policies of the Trump administration for its <br />impact on economic and market conditions. <br />© PFM Asset Management LLC <br />REDWOOD CITY <br />86.1.A. - Page 14