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S.B. - Page 15 of 59 REDWOOD CITY Fixed Income Sector Outlook — January 2020 For the Quarter Ended December 31, 2019 Market Update Sector Our Investment Preferences Comments COMMERCIAL PAPER �— • • Money market credit spreads remain attractive. New issue supply may increase in the / CD new year. TREASURIES • • T -Bills have rallied further on Fed purchases and low repo rates. Other short - T -Bill term instruments remain relatively more attractive. —� • • T -Notes offer attractive yield pickup vs. T -Bills in certain maturities. T -Note FEDERAL AGENCIES • Bullet valuations remain near historical tights across the curve and continue Bullets to trade in a relatively narrow range. New issues should be evaluated for opportunities to add relative value; otherwise, Treasuries should be preferred. Callables Redemptions remained elevated during Q4 but have started to slow as rates have begun to stabilize. As a result, new issue supply has slowed as well. Spread pickup vs. bullets remains well below YTD averages, with little chance for outperformance. Accounts should favor bulleted structures vs. callable. • Spreads remain anchored across the curve. Expect modestly wider spreads S U P R A N A T I O N A L S _— in Q1 on account of higher issuer funding targets and favorable USD basis. New issues should be evaluated for opportunities to add relative value. CORPORATES • Solid economic data, an accommodative Fed, and positive technicals Financials continue to support the corporate sector. Tight valuations limit the potential for outperformance in 2020. A growing list of uncertainties and pending supply could result in wider spreads and better buying opportunities. Industrials S E C U R I T I Z E D • AAA -rated ABS yield spreads widened during December and are currently Asset -Backed near their 3 -year historic average. Broad measures of auto ABS spreads are comparable to spreads on high-quality corporate securities. Agency Mortgage -Backed ' Q4 saw strong excess returns from MBS as spreads narrowed significantly. Buyers were enticed by higher spreads, lower volatility, and the expectation Agency CMBS that the Fed is on hold. • Agency CMBS spreads widened in December. The sector has good relative value compared to less structured MBS and other government sectors. MUNICIPALS ' Value remains in new issue taxable deals which continue to be driven by the in issuance, surge taxable an alternative to tax-exempt advance refundings. 10 Current outlook Negative Slightly Negative PFM Asset Management LLC Outlook one month ago Neutral Slightly Positive