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▸The Federal Open Market Committee (FOMC)maintained the target range for the federal funds rateat 4.25-4.5% during both meetings in Q2, citingresilience in the labor market and marginalimprovements in an otherwise sticky inflation picture.▸U.S. Treasury yields in the intermediate-term (2-7years) moved lower over the quarter. The change inyields reflected ongoing market sensitivity to domesticpolicy uncertainty, with a continued focus on thepotential impacts of taxes, tariffs, immigration, andderegulation. However, progress on tradenegotiations and lower recession probabilities keptthe declines in check. As a result of the Treasury rally,total returns were strong for the quarter.▸Federal Agency & supranational spreads remainedlow throughout Q2. Both sectors produced slightlypositive excess returns for the quarter. Issuanceremained light and the incremental income from thesectors is near zero.▸Investment-Grade (IG) corporate bond spreadsspiked early in the quarter on tariff announcements,but as external stressors eased much of the wideningretraced. Demand for new issuance remains strongwhile net issuance is predicted to decrease over thebalance of the year. Lower-quality issuersoutperformed as did banks and other financials.▸Asset-Backed Securities spreads retraced overquarter, but to a lesser degree than most othersectors. ABS showed the impact of the slowerdecrease in spreads by posting more modest excessreturns over the quarter. We expect the sector tocontinue generating value from carry going forward.▸Mortgage-Backed Securities performance wasstrong across all structures and coupons as ratevolatility moderated over the quarter. Likewise,Agency-backed commercial MBS (CMBS) alsoposted strong performance for the quarter and sawpositive excess returns.▸Short-term credit (commercial paper and negotiablebank CDs) yields on the front end of the yield curverose slightly in response to the approaching Treasury“X-Date” (estimated date for Treasury to exhaustfunds under the debt ceiling) while yields fell modestlyon the long end as demand shifted into longer-termTreasury notes. Yield spreads tightened over thequarter in response to moderated issuance andstrong demand.Fixed-Income Sector Commentary – 2Q 2025The views expressed within this material constitute the perspective and judgment of PFM Asset Management at the time of distribution (06/30/2025) and are subject to change. Information is obtained from sources generally believed to be reliable and available to the public; however, PFM Asset Management cannot guarantee its accuracy, completeness, or suitability.For the Quarter Ended June 30, 2025Market UpdatePFM Asset Management | pfmam.comCITY OF REDWOOD CITY217.A. - Page 27 of 6337