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Portfolio RecapFor the Quarter Ended June 30, 2017Fixed Income ManagementKey drivers of market conditions in the second quarter included•an additional Federal Reserve (Fed) rate hike;•mixed readings on key economic data in the U.S.;•persistently subdued inflation readings;•narrowing credit spreads; and•stronger growth readings and higher yields in Europe and elsewhere.Short-term and long-term Treasury yields diverged during the second quarter as short-term (three years and under) yields moved higher, pricing in the Fed’s June rate hike, while yields on longer-term maturities fell amid muted inflation and fading prospects for expansionary fiscal policy. As a result, the yield curve flattened, retracing all the steepening that took place following the U.S. presidential election. Our duration strategy is to remain largely in line with the benchmark’s duration unless we have a strong conviction that rates are not appropriately reflecting market risks and expectations. Since market conditions were consistent with moderate growth and the Fed on track to gradually raise rates, we positioned the portfolio to be “neutral”—with its duration equal to the benchmark’s duration—to start the second quarter. During May and June, however, we allowed the portfolio’s duration to drift shorter as we believed that rates were not adequately pricing in the likelihood of a near-term Fed rate increase. When the Fed did raise rates in June, shorter-term portfolios benefited as yields adjusted to reflect a higher Fed funds rate.Federal agency yield spreads narrowed further amid minimal new issuance, ending the quarter at historically tight levels. Our strategy remained opportunistic as we sought to•purchase new issues that offered acceptable yield concessions, mostly in the 2-3 year maturity range;•favor U.S. Treasuries in most other maturities; and•consider swap opportunities out of expensive agency holdings into U.S. Treasuries or other sectors.We maintained corporate allocations as the sector’s additional income remained advantageous, and the sector benefited from further spread tightening. The corporate sector generated strong outperformance relative to comparable-maturity Treasuries, logging its seventh straight quarter of outperformance.In the money market space, short-term Treasury yields rose, repricing to reflect the Fed’s ¼ percent June rate hike. The yield spread offered by commercial paper (CP) tightened during the quarter to levels not seen since the Fed began raising rates in late 2015 as the effects of money market reform and conviction about further Fed rate hikes faded. PFM Asset Management LLCREDWOOD CITY106.1.C. - Page 20