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Fixed-Income Sector Outlook – 1Q 2025 <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 moved notably higher throughout the <br />4th quarter as markets pared back expectations for <br />aggressive Fed rate cuts in 2025 and now price a more tepid <br />pace. We expect to see ongoing steepening of the yield <br />curve with higher volatility as both fiscal and monetary policy <br />evolve.▸Federal Agency & Supranational spreads are likely to <br />remain at tight levels. Government-heavy accounts may find <br />occasional value on an issue-by-issue basis, particularly in <br />Supranationals as issuance increases in the new year.▸Taxable Municipals continue to see little activity due to an <br />ongoing lack of supply and strong demand which continues <br />to suppress yields in both the new issue and secondary <br />markets. We expect few opportunities in the near term.▸Investment-Grade Corporate yield spreads are historically <br />tight and our view is that the combination of heightened <br />market volatility, fiscal policy uncertainty, and higher Q1 <br />issuance seasonality may create opportunities to increase <br />allocations at more attractive levels. Strength in market <br />technicals and favorable fundamentals in the sector will <br />likely limit significant downside. As a result, we will look to <br />tactically reduce allocations in the sector to make room for <br />future opportunities, with a focus on industry and credit <br />quality-specific selectivity. <br />▸Asset-Backed Securities fundamentals remain intact <br />and have led to strong performance in the past quarter. <br />New-year consumer credit trends will depend on the labor <br />market, the resiliency of economic growth, and the <br />consumer’s response to monetary policy easing, which <br />tends to work on a lagging basis. Credit metrics are <br />expected to be constructive through 2025 and we will <br />therefore seek to maintain allocations in the sector via the <br />reinvestment of passive cash flows in new issuance over <br />the coming months.▸Mortgage-Backed Securities are expected to produce <br />muted excess returns entering the new year. Since the <br />sector is highly rate sensitive, policy uncertainty and Fed <br />caution may increase volatility. We may use any <br />meaningful spread widening to add at more attractive <br />levels.▸Short-term credit (commercial paper and negotiable <br />bank CDs) yields have drifted higher in response to a <br />slower pace of rate cuts in 2025. Yield spreads also begin <br />to drift wider, and we believe spreads of 20 to 30 basis <br />points offer good relative value. Given a money market <br />yield curve that is now positively sloped, we favor a mix of <br />floating rate in the front end with fixed rate in longer <br />maturities. <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 change.Information is obtained <br />from sources generally believed to be reliable and available to the public; however, PFM Asset Management cannot guarantee its accuracy, completeness, or suitability. <br />PFM Asset Management | pfmam.com <br />CITY OF REDWOOD CITY <br />22 <br />6.A. - Page 28 of 60 <br />33