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6.1. - Page 2 of 38 The portion of the City's portfolio that is managed by PFM has a total market value at quarter end of $140,300,732. As of September 30, the portfolio was earning an annual yield at cost of 2.62% and the yield at market was 2.93%. The average maturity of the portfolio was 2.65 years. The market benchmark, selected with consultation from the Council Finance/Audit Subcommittee, is the Bank of America Merrill Lynch (BofA ML) 1-5 year U.S. Treasury Index. Below is a table summarizing the City's portfolio performance compared to the benchmark, for the third quarter of 20181. Economic data in the quarter was favorable; inflation is near the Fed's 2% target, and strong labor market conditions continue. Most investment-grade sectors contributed to positive excess returns (return in excess of similar duration Treasuries). Corporate returns dominated their government counterparts, adding significant value to the portfolio in the third quarter. Federal agencies remained expensive as most maturities offer less than 5% incremental yield relative to U.S. Treasuries. Supranationals continued to offer attractive yield advantage over comparable maturity Treasuries. Similarly, AAA rated asset-backed securities (ABS) generated attractive excess returns for the quarter, while providing a level of diversification to the credit allocations. The yield environment continued to favor short-term credit, commercial paper and negotiable certificates of deposits (CD), which provided incremental income and interest rate risk protection to the portfolio. Looking ahead, the Federal Reserve has indicated another interest rate increase is likely in 2018, and three to four increases in 2019. As interest rates continue to increase, PFM will continue to maintain the portfolio with a defensive duration bias (keeping the duration at 95% of the benchmark) to help insulate market values in a raising interest rate environment. PFM will continue to reduce agency holdings and seek better value in other sectors. In conjunction with tight yield spreads, PFM is going to be more selective and defensive with corporate positioning, continuing to favor issuers with stronger balance sheets and valuations, which can better withstand the current phase of the credit cycle. Negotiable CDs and ABS offer attractive incremental income compared to government security alternatives. Short-term money market investments such as commercial paper and CDs have a steep yield curve, offering opportunities to extend maturities and add to allocations in this space. PFM will continue to monitor incoming economic data, federal policy, and sector relationships to identify market opportunities. PFM has provided an in-depth market summary and discussion on their investment strategy and outlook in the attached investment report. 1 Returns for periods under one year are periodic, and all other returns are annualized. Performance excludes funds invested in the San Mateo County Treasurer's investment pool and State Treasurer's investment pool. City of Redwood City 1017 Middlefield Road, Redwood Ci7CA. 94063 Tel: 650-780-7000 www.redwoodcity.org 181 Redwood City 0.28% 0.56% 2.38 2.93% 2.62 years BofA ML 1-5 year U.S. Treasury Index 0.05% 0.26% 2.57 2.86% 2.77 years Economic data in the quarter was favorable; inflation is near the Fed's 2% target, and strong labor market conditions continue. Most investment-grade sectors contributed to positive excess returns (return in excess of similar duration Treasuries). Corporate returns dominated their government counterparts, adding significant value to the portfolio in the third quarter. Federal agencies remained expensive as most maturities offer less than 5% incremental yield relative to U.S. Treasuries. Supranationals continued to offer attractive yield advantage over comparable maturity Treasuries. Similarly, AAA rated asset-backed securities (ABS) generated attractive excess returns for the quarter, while providing a level of diversification to the credit allocations. The yield environment continued to favor short-term credit, commercial paper and negotiable certificates of deposits (CD), which provided incremental income and interest rate risk protection to the portfolio. Looking ahead, the Federal Reserve has indicated another interest rate increase is likely in 2018, and three to four increases in 2019. As interest rates continue to increase, PFM will continue to maintain the portfolio with a defensive duration bias (keeping the duration at 95% of the benchmark) to help insulate market values in a raising interest rate environment. PFM will continue to reduce agency holdings and seek better value in other sectors. In conjunction with tight yield spreads, PFM is going to be more selective and defensive with corporate positioning, continuing to favor issuers with stronger balance sheets and valuations, which can better withstand the current phase of the credit cycle. Negotiable CDs and ABS offer attractive incremental income compared to government security alternatives. Short-term money market investments such as commercial paper and CDs have a steep yield curve, offering opportunities to extend maturities and add to allocations in this space. PFM will continue to monitor incoming economic data, federal policy, and sector relationships to identify market opportunities. PFM has provided an in-depth market summary and discussion on their investment strategy and outlook in the attached investment report. 1 Returns for periods under one year are periodic, and all other returns are annualized. Performance excludes funds invested in the San Mateo County Treasurer's investment pool and State Treasurer's investment pool. City of Redwood City 1017 Middlefield Road, Redwood Ci7CA. 94063 Tel: 650-780-7000 www.redwoodcity.org 181