AgdaPkt 2018-09-24 Joint SA PFA - Laserfiche WebLink

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For the Quarter Ended June 30, 2018 REDWOOD CITY Outlook rn Investment Outlook n • In light of continued economic growth, inflation near the Fed's 2% target, and strong labor market conditions, the Fed appears poised to raise race further. As a result of the expectation for one or two additional hikes in 2018 and three to four more in 2019, our view rema ins that the general tr � t of interest rates will be to increase gradually over the near term. Therefore, we plan to maintain a defensive duration postu re to mitigate a portio 0-)f interest rate risk relative to the benchmark. • Our outlook for each of the major investment-grade fixed income sectors is as follows: Federal agency securities remain expensive as most maturities offer less than five basis points (0.05%) of incremental yield relative to U.S. Treasuries. We will continue to reduce exposure to agencies in maturities where spreads are tight, seeking better value in Treasuries or other sectors. Over the past quarter, however, the 2-3 year portions of the agency curve experienced modest widening that may create some opportunities in the third quarter. Given an expected light supply of supranationals overthe coming months, additional purchases may be limited. However, current allocations are expected to be maintained as the portfolio benefits from decent incremental income relative to traditional agencies. A sh A to euro - denominated issues (preferred recently by a number of supranational issuers) may push secondary U.S. dollar-denominated spreads modestly wider, which could provide additional opportunity in the sector. While fundamentals remain generally healthy and incremental income is still modestly attractive, potential headwinds in the corporate sector are beginning to temper our overall constructive guidance. As a result, our viewon the sector has shifted to a more market -neutral and selectively opportunistic stance. In addition, we have a preference for financials and selective industrial issuers with stro nger balance sheets, which we think can better navigate the current phase of the credit cycle. In conjunction with our somewhat more defensive posture, negotiable certificates of deposit (CD) and asset-backed securities (ABS) offer attractive incremental income compared to government security altematives. • Short-term money market investors continue to reap the rewards of current monetary policy tightening and higher overnight target rates. Further, the yield curve for high-quality commercial paper and negotiable certificates of deposit (CP/CD) is quite steep and attractive, offering opportunities to extend maturities and add to allocations in this space. PFM Asset Management LLC 10