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INVESTMENT STRATEGY OUTLOOKFor the Quarter Ended March 31, 2017Fixed Income Management2017 PFM Asset Management LLCWe anticipate the Fed to remain on track to make two additional rate hikes in 2017, matching the three hikes projected for 2017 by the Federal Open Market Committee’s “dot plot.” In addition, a potential reduction in the size of the Fed’s balance sheet later in the year could have significant implications for the markets.As the market awaits clarity on policies proposed and enacted by the Trump administration, financial markets (both bonds and equities) may become more range-bound. Since yields are currently stable and we expect no action at the next FOMC meeting in May, we are targeting portfolio durations to closely match that of benchmarks. We will continue to revisit this position regularly, especially in light of the potential for higher yields later in the year. During periods of rising rates, our active management approach, which seeks to maximize long-term returns, may result in the realization of short-term losses. This is in contrast to the gains realized over the past several years, which resulted from generally declining rates.Agency yield spreads over Treasuries continue to remain historically narrow. As a result, our strategy will generally favor U.S. Treasuries over agencies unless specific issues offer identifiable value. Supranational issues may also offer opportunities in the space. Although yield spreads on corporate securities drifted wider at the end of the first quarter, they remain near multi-year lows. Identifying incremental return potential in the corporate bond sector requires careful relative value analysis. Improving corporate profits, as well as anticipated pro-business measures from the Trump administration, form a favorable backdrop for the credit sector. We will continue to evaluate opportunities in the MBS and ABS sectors, purchasing those issues we believe are well structured, offer adequate yield spreads, and which have limited extension and headline risk from Fed balance sheet tapering. We anticipate continuing to add to ABS allocations, where permitted, as the sector offers good incremental return potential.Our strategy favors broad allocation to various credit sectors, including corporate notes, negotiable bank CDs, and asset-backed securities. Yields on commercial paper and negotiable CDs continue to offer significant yield pickup relative to short-term government securities. We will continue to monitor incoming economic data, Fed policy, and sector relationships to identify market opportunities. This will include assessing the impact of additional policies put forth by the Trump administration.116.1.A. - Page 20