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Fixed-Income Sector Commentary – 4Q 2024 <br />For the Quarter Ended March 31, 2022 <br />Market Update <br />For the Quarter Ended December 31, 2024 <br />MarketUpdate <br />▸U.S. Treasury yields reacted to the market attempting to <br />digest the potential impacts of the new administration’s <br />policy proposals. Areas of focus include taxes, tariffs, <br />immigration, and deregulation, which the market generally <br />expects will result in more growth but larger budget deficits <br />and higher inflation. Additionally, the Federal Open Market <br />Committee (FOMC) continued with rate cuts, as expected, <br />cutting a total of 100 bps (basis points) in 2024. While the <br />Fed cut rates at both FOMC meetings in the 4th quarter, <br />guidance on future rate cuts point toward a much slower <br />pace of cuts than previously anticipated. The culmination of <br />both fiscal and monetary impulses led the Treasury curve <br />steeper with the 2-year Treasury yield rising 60 bps in the <br />quarter while longer 10-year Treasuries rose 79 bps. As a <br />result of the Treasury sell-off, total returns were negative for <br />the period.▸Federal Agency & Supranational spreads remained low <br />and range bound throughout Q4. 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 minimal. <br />▸Investment-Grade (IG) Corporates posted anotherstrong relative quarter as robust investor demandremained intact while issuance slowed into year end.Yield spreads tightened further toward multi-year tights.From an excess return perspective, lower-quality andlonger-duration issuers outperformed in Q4. Excessreturns of financial and banking issuers once again ledmost other industries across much of the yield curveduring the quarter.▸Asset-Backed Securities spreads are tighter than theirhistorical average while their underlying technicals remainstrong. Cross-sector spread comparisons relative tocorporates have shifted notably, as ABS spreadstightened substantially through year-end and now tradethrough corporates. As a result, ABS was a top of classperformer for Q4.▸Mortgage-Backed Securities were adversely affected byheightened rate volatility and headwinds in the housingmarket. After an exceptionally strong Q3, agency-backedmortgages underperformed Treasuries in the fourthquarter. On the other hand, well-structured Agency-backed commercial MBS (CMBS) performed better forthe quarter and saw positive excess returns.▸Short-term credit (commercial paper and negotiablebank CDs) yields on the front end fell in response to theFed rate cuts, but the money market yield curvesteepened on prospects for “higher for longer.” Yieldspreads also widened modestly across the money marketcurve, most notably towards the back end. <br />The views expressed within this material constitute the perspective and judgment of PFM Asset Management at the time of distribution (12/31/2024) and are subject to <br />change.Information is obtained from sources generally believed to be reliable and available to the public; however, PFM Asset Management cannot guarantee its accuracy, <br />completeness, or suitability. <br />PFM Asset Management | pfmam.com <br />CITY OF REDWOOD CITY <br />21 <br />6.A. - Page 27 of 60 <br />32