AgdaPkt 2018-02-26 Joint SA PFA - Laserfiche WebLink

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REDWOOD CITY For the Quarter Ended December 31, 2017 Outlook rn 2018 Investment Outlook and Strategy cn Generally, the economic themes that brought 2017 to a close will carry forward into 2018, including improving growth, stable job c production, healthy personal consumption, and strong corporate fundamentals. Cn Following three hikes in 2017, the Fed's "dot plot," released after the December FOMC meeting, indicated an expectation for three more hikes in 2018. As of year-end, the market -implied probability of a rate hike at the March FOMC meeting was around 70%. The FOMC begins 2018 balancing several factors: persistently low inflation, uncertainty around the pace of economic growth, and the continuation of balance sheet normalization. Additionally, a change in leadership at the Fed—Jerome Powell will replace Janet Yellen as Fed Chair—has the potential to create some uncertainty. As a current Fed governor, Powell is expected to follow closely in Yellen's footsteps. Our outlook for each of the major investment-grade fixed income sectors are as follows: Federal agency spreads remain tight; however, the best value relative to U.S. Treasuries is in the 2- to 3 -year area of the curve. While callable agency value waned towards the end of 2017, wider spreads in the new year may provide an opportunity to capture incremental yield. Supranational issuance came to a halt at the close of the year, and with it some of their incremental value. However, with the prospect of high seasonal supply in the first quarter, the expectation exists for attractive spreads and purchase opportunities. Corporate yield spreads are expected to remain stable, with incremental income being supportive of continued expected outperformance. As always, careful issuer due diligence will drive selection. The relative value dynamics of the municipal market may shift in the wake of tax reform. Although issuance is likely to fall sharply in 2018, creating a potential supply shortage, the impact of lower individual tax rates could be negative. Given the steepness of the short-term yield curve (under one year), short-term credit instruments like commercial paper and negotiable CDs look particularly attractive. We believe their current yields fully compensate for at least three Fed rate hikes in 2018. PFM Asset Management LLC 10