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Fixed-Income Sector Commentary – 3Q 2024 <br />PFM Asset Management LLC <br />© PFM Asset Management LLC | pfmam.com <br />For the Quarter Ended March 31, 2022 <br />California Affiliated Risk Management Authorities Market Update <br />CITY OF REDWOOD CITY <br />For the Quarter Ended September 30, 2024 <br />Market Update <br />▸U.S. Treasury yields spent most of the quarter preparing <br />for the first Fed rate cut resulting in the 2-year U.S. <br />Treasury yield rallying over 100 bps. The Fed noted in <br />July that the risks to jobs and prices have come into <br />better balance and delivered a much-anticipated interest <br />rate cut at its September meeting, reducing the overnight <br />rate by 50 bps. After spending a record amount of time <br />inverted, the yield curve steepened notably (as measured <br />by the yield difference between the 2- and 10-year U.S. <br />Treasury notes) and dis-inverted for the first time since <br />July 2022. As a result of the Treasury rally, total returns <br />were strong for the period. <br />▸Federal Agency & Supranational spreads remained low <br />and range bound throughout Q3. These sectors produced <br />muted excess returns relative to other investment grade <br />fixed income sectors as issuance has remained quite light <br />and the incremental income from the sectors is near zero. <br />▸Investment-Grade (IG) Corporates posted a strong <br />quarter as sustained high issuance in Q3 was well- <br />absorbed by robust investor demand. As a result, yield <br />spreads ended the quarter very near their two-year lows. <br />From an excess return perspective, lower-quality and <br />longer-duration issuers outperformed in general in Q3. <br />Excess returns of financial and banking issuers once <br />again led most other industries across the majority of the <br />yield curve during the quarter. <br />▸Asset-Backed Securities generated muted excess <br />returns for the quarter as yield spreads widened <br />modestly and remained elevated for both automobile <br />and credit card collateral. Attractive incremental income <br />helped offset the adverse price impact of wider spreads <br />during the quarter. <br />▸Mortgage-Backed Securities were top of class <br />performers during Q3 as spreads continued to test 12- <br />month lows. Regardless of collateral and coupon, <br />agency-backed mortgages rebounded soundly in Q3 <br />following an underwhelming Q2. Declining mortgage <br />rates and positive optimism in the housing market <br />provided a tailwind for the sector during the quarter. <br />▸Short-term credit (commercial paper and negotiable <br />bank CDs) yields fell over the quarter in response to <br />the expected Fed rate cut. Yield spreads continued to <br />tighten relative to similar maturity USTs. However, the <br />sector selectively provided value with incremental <br />yields ranging 17 to 20 basis points in 9- to 12-month <br />maturities. <br />6.A. - Page 31 of 65 <br />40