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REDWOOD CITY <br />For the Quarter Ended December 31, 2017 <br />Portfolio Review <br />rn <br />Portfolio Recap Cn <br />In the fourth quarter, economic data was generally favorable, the unemployment rate hovered near a 15 -year low, inflation remained c <br />check, and the Fed raised rates for a third time in 2017. At the same time, both consumer and business confidence remained high, e <br />Congress passed large corporate and individual tax cuts. <br />Market reaction to the final tax bill reflected expectations for at least a near-term positive economic impact, causing both interest rates <br />and U.S. equity markets to rise. <br />The post -tax -bill market moves amplified existing trends. During the quarter <br />2 -year Treasury yields rose 40 basis points (0.40%), reflecting the FOMC's December rate hike and expectations for more policy <br />changes going forward, <br />• 10 -year Treasury yields rose 9 basis points, muted by low inflation prospects and strong demand for yield by global investors, <br />• the yield curve flattened to its narrowest levels since 2007, and <br />equity markets capped the first calendar year ever with 12 consecutive months of positive returns. <br />The strength of the U.S. economy, coupled with the December Fed rate hike, drove yields on all but the longest Treasury maturities <br />higher in the fourth quarter. As a result, fixed-income returns were mixed for the quarter, with shorter indexes generating negative <br />returns; however, on a positive note, reinvestment opportunities became more attractive. <br />Higher yields, narrow credit spreads, and a flat yield curve created a challenging investment landscape. As such, we generally <br />employed a duration -neutral portfolio stance relative to the benchmark. <br />PFM Asset Management LLC 2 <br />