fixed income monthly market update · 2020-06-11 · 30-yr fixed mortgage rate (rt.) housing market...

© PFM 0

Fixed IncomeMonthly Market UpdateJanuary 2020

PFM Asset Management LLC

213 Market StreetHarrisburg, PA 17101

717.232.2723pfm.com

Prepared by the Portfolio Strategies Group

© PFM 1

U.S. Economy Heads into 2020 with Steady Growth

Source: Bloomberg, data available as of 1/31/2020.

0%

1%

2%

3%

4%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

U.S. GDP Growthall four quarters’

readings have topped analyst

estimates

2017 2018 2019

200

450

700

950

1,200

1,450

2005 2007 2009 2011 2013 2015 2017 2019

New Home Sales (000s, annual pace)

highest level in 12 years

227193 179

223

177

225

0k

100k

200k

300k

2015 2016 2017 2018 2019 Jan-20

Average Monthly Job Growth

80

100

120

140

160

2015 2016 2017 2018 2019 2020

Conference Board Consumer Confidence

Remains near all-time highs

© PFM 2

Market Reaction to the Coronavirus Outbreak

Source: Bloomberg, as of 1/31/2020. *Source: WHO, CDC, ECDC, NHC, NIH, as of 2/12/20.

1.00%

1.50%

2.00%

2.50%

3M

1Y

2Y

3Y

4Y

5Y

10Y

30YMaturity

U.S. Treasury Yield Curve

January 31, 2020December 31, 2019

$50

$55

$60

$65

12/31/19 1/10/20 1/20/20 1/30/20

Price of OilWTI crude oil futures, $/barrel

0.50%

1.00%

1.50%

2.00%

2.50%

Dec '19 Mar '20 Jun '20 Sep '20 Dec '20

Federal Reserve Target Overnight Rate

1/31/2020 Market Projection

12/31/2019 Market Projection

45k

1k

5k

0k

10k

20k

30k

40k

50k

1/21/20 1/25/20 1/29/20 2/2/20 2/6/20 2/10/20

Coronavirus Cases*Confirmed Cases Deaths Recovered

© PFM 3

A Slowdown in Growth in China Could Weigh Heavily on Global Growth

39%

16%

10%1%5%

0%

20%

40%

60%

80%

Asia

Contributions to 2019 Global Economic Growth (%)

Others

Korea

ASEAN*

India

China

Source: IMF, World Economic Outlook and IMF staff Estimates. *Association of Southeast Asian Nations includes Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. **Based on nominal GDP.

Total Contribution from Asian Countries: 71%

4%

16%

31%

25%

0%

5%

10%

15%

20%

25%

30%

35%

2002 2019

Share of Global GDP**China United States

China’s share of global GDP has increased significantly since the SARS outbreak in

2002, leading to concerns of what the economic impact will

be of the Coronavirus.

© PFM 4

Coronavirus Complicates Global Economic Outlook

Source: Bloomberg, Statista, as of 1/31/2020. *Includes emerging Asian market economies other than China (2020 Projections).

-1% 0% 1% 2% 3% 4% 5% 6% 7%

United States

Eurozone

Other Asia*

Japan

China

Potential Impact on Global Economic OutputQ1 2020 new estimate Q1 old estimate

-1.5%

-0.4%

-0.4%

-0.1%

-0.1%

Impact

© PFM 5

2,300

2,500

2,700

2,900

3,100

3,300

3,500


S&P 500 Price Change

Stocks Begin the Decade with Added Volatility

Source: Bloomberg, as of 2/10/2020.

2018 close

YTD Return: +3.3%

© PFM 6

Current Market Themes

U.S. economic conditions are characterized by:• Robust job growth, strong consumer confidence, and a solid housing market • Manufacturing stabilization as political uncertainty fades • Coronavirus outbreak presenting emerging new risks

Emerging risks over the month prompted a significant rally in Treasuries. The yield curve flattened and is now inverted once again (between three months and ten years). The 30-year Treasury yield settled at 2.00%, near a five month-low.

The Federal Reserve expectedly left interest rates unchanged at its January meeting, maintaining the target range at 1½ to 1¾ percent. FOMC members have a favorable view of the U.S. economy and believe the current policy stance will remain appropriate unless there is a meaningful change in the economic outlook.

The Federal Reserve’s balance sheet has expanded by over $400 billion since August 2019. The Fed has committed to T-Bill purchases at least into Q2 and continued repo operations through April 2020 to ensure an ample supply of reserves.

Manufacturing emerged from the contraction that began last summer amid a surge in new orders. ISM PMI Manufacturing rebounded sharply to 50.9 in January, above the 50-line demarcation that signals expansion, for the first time in six months.

U.S equities soared to record highs amid an improved trade outlook in early January; however, in the latter half of the month, the coronavirus outbreak left stocks struggling for direction. Over the month, the S&P 500 lost 0.04%, the Dow retreated 0.9%, while the NASDAQ advanced 2.0% on solid tech earnings.

The housing market continues to gather momentum amid low mortgage rates and solid job growth. For December, existing homes sales jumped 3.6%, while housing starts surged to a 13-year high at an impressive 16.9%.

© PFM 7

1.0%

0.8%

3.0%

2.1%

1.2%

1.1%

3.1%

2.0% 2.1% 2.1%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

U.S. GDP Contributors and DetractorsPersonal Consumption Fixed Investment Private Inventories Net Exports Gov't Expenditures

Economic Growth Continued at a Moderate Pace in Q4

2016 2017 2018 2019Source: Bureau of Economic Analysis.

In 2019, all four quarters’ readings beat analyst estimates.

© PFM 8

The Consumer Remains in the Driver Seat

2.3%1.0% 0.8%

3.0%2.1%

1.2%

-3%

-2%

-1%

0%

1%

2%

3%

3Q 4Q 1Q 2Q 3Q 4Q

Personal Consumption

Source: Bureau of Economic Analysis

0.1%0.5%

0.6%-0.3%

-0.1%0.0%

-3%

-2%

-1%

0%

1%

2%

3%

3Q 4Q 1Q 2Q 3Q 4Q

Fixed Investment

2.1%

0.1% 0.5%

-0.9%

0.0%

-1.1%

-3%

-2%

-1%

0%

1%

2%

3%

3Q 4Q 1Q 2Q 3Q 4Q

Private Inventories

-2.1% -0.4%

0.7%

-0.7% -0.1%

1.5%

-3%

-2%

-1%

0%

1%

2%

3%

3Q 4Q 1Q 2Q 3Q 4Q

Net Exports

2018 2019

2018 2019 2018 2019

2018 2019

notable decline in imports led to outsized contribution in 4Q

Consumer spending continued to boost GDP last quarter, though at a slightly

slower pace than seen earlier this year.Business investment was a detractor

for the 3rd straight quarter.

The GM strike and the drop in imports both contributed to a

decline in inventories.

© PFM 9

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2004 2007 2010 2013 2016 2019

Housing Starts (000s, SAAR)

-0.15% -0.16%-0.18%

-0.04%

-0.11%

0.17%0.21%

4.40%4.57% 4.51%

4.08%3.80%

3.72%3.86%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

0.3%

2Q-18 3Q-18 4Q-18 1Q-19 2Q-19 3Q-19 4Q-19

Growth Follows Falling Mortgage Rates

Residential Contrib. to GDP30-Yr Fixed Mortgage Rate (rt.)

Housing Market Gathers Strength

Source: Bankrate.com U.S. Home Mortgage 30 Year Fixed National Average; Bloomberg, as of 01/31/20.

Highest Since 2007

© PFM 10

Recession Recession

2001 2007-2009 Current

Yield Curve X X ?

Credit Spreads X X

Money Supply X X ?

Wage Growth X X ?

Commodities X X ?

Housing Permits ? X

Jobless Claims X ?

Retail Sales X X

Job Sentiment X X

ISM New Orders X X X

Profit Margins X X ?

Business Investment X ? X

Most Domestic Economic Indicators Not Signaling Imminent Recession

Fin

an

cia

lIn

fla

tion

Con

sum

erB

usi

nes

s A

ctiv

ity

Source: BBG, BLS, Federal Reserve, Census Bureau, ISM, BEA, Conference Board, & ClearBridge Investments. Current as of 12/31/2019.

X = Contraction ? = Caution = Expansion

© PFM 11

0.5%

1.0%

1.5%

2.0%

2.5%

Dec '16 Dec '17 Dec '18 Dec '19 Dec '20

The Fed on Hold, but Market Expects at Least One Rate Cut by Year-End

target rate (mid-point)

Market Projection

Federal Reserve Target Overnight Rate

20173

20184

20193

Source: Bloomberg. Market Projection as of January 31, 2020.

“I would say now there are grounds for what I would call cautious optimism about the outlook for the global economy… We are not all assured of a global rebound, but there are signs and reasons to expect it – and then comes the coronavirus.”

– Fed Chair Jerome Powellpress conference after January 29, 2020 Fed meeting

© PFM 12

Treasury Yields Fall to New Lows Amid Emerging Risks


1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

Jan '18 Jul '18 Jan '19 Jul '19 Jan '20

2-Year Treasury

1.51%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

Jan '18 Jul '18 Jan '19 Jul '19 Jan '20

10-Year Treasury3.24%

2.97%

1.31%

© PFM 13

1.54%

1.31%

1.51%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3M

1Y

2Y

3Y

4Y

5Y

10Y

30Y

Yiel

d

Maturity

January 31, 2020

December 31, 2019

December 31, 2018

Treasury Yield Curve Becomes Inverted Once Again


U.S. Treasury Yield Curve

30Y

© PFM 14

Treasury Yields Resume Downtrend


-0.81%

-1.03%-0.92%

-0.85% -0.82% -0.75% -0.77%-0.62%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

3-month 12-month 2-Year 3-Year 5-Year 7-Year 10-Year 30-Year

2019 Change (12/31/18- 12/31/19)

-0.01%

-0.14%

-0.26%-0.31%

-0.38%-0.41% -0.41% -0.39%

-0.6%

-0.4%

-0.2%

0.0%

3-month 12-month 2-Year 3-Year 5-Year 7-Year 10-Year 30-Year

2020 YTD Change(12/31/19-01/31/20)

© PFM 15

Yield Environment as of January 31, 2020

Source: Bloomberg BVAL yield curves for Treasury, Agency, and Corporate. 3-month corporate yields from commercial paper; A-1+ for AA and A-1 for A. Yields are for indicative purposes only; actual yields may vary by issue.

Maturity Treasury FederalAgency

AA Corporate

A Corporate

BBBCorporate

3-Month 1.54% 1.54% 1.66% 1.73% 1.92%

1-Year 1.42% 1.45% 1.59% 1.66% 1.89%

2-Year 1.31% 1.43% 1.52% 1.63% 1.90%

3-Year 1.29% 1.40% 1.54% 1.67% 1.96%

5-Year 1.31% 1.48% 1.71% 1.84% 2.19%

10-Year 1.51% 1.80% 2.16% 2.34% 2.82%

© PFM 16

Fed Open Market Operations and T-Bill Purchases to Keep Repo Rates under Control

Source: Bloomberg, Federal Reserve Bank of St. Louis, J.P. Morgan, as of 1/28/20.

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%

Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20

Repo RateEffective Fed Funds Target Range SOFR IOER

Repo rates remain toward the bottom of the effective

fed funds rate target range.$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

23-S

ep30

-Sep

7-O

ct14

-Oct

21-O

ct28

-Oct

4-N

ov11

-Nov

18-N

ov25

-Nov

2-D

ec9-

Dec

16-D

ec23

-Dec

30-D

ec6-

Jan

13-J

an20

-Jan

27-J

an

Open Market OperationsT-Bill Purchases Term OMOs O/N OMOs

In total, the Fed injected $412bn of liquidity into the banking system at the end of 2019

Term Open-Market Operations

Overnight Open-Market Operations

© PFM 17

1.20%

1.30%

1.40%

1.50%

1.60%

1.70%

1.80%

1.90%

2.00%

1 2 3 4 5 6 7 8 9 10 11 12Maturity in Months

Money Market Yield Curves

CD/CP Average

Agencies

Treasuries

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%


Yield Spread on 6-month Commercial Paper over T-Bill

Short-Term Credit Spreads Have Tightened Back to Less Attractive Levels

Source (left): Bloomberg, as of 01/31/2020. Source (right): PFM Trading Desk, as of 01/31/2020. 6-mo CP yield spread based on A1/P1 rated CP index.

15 bps

© PFM 18

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0Maturity (years)

Federal Agency Yield Spreads

Spread Sectors Provide Only Modest Value

Source: ICE BofAML 1-5 year Indices via Bloomberg, MarketAxess and PFM as of January 31, 2020. Spreads on ABS and MBS are option-adjusted spreads of 0-5 year indices based on weighted average life; spreads on agencies are relative to comparable maturity Treasuries. CMBS is Commercial Mortgage-Backed Securities.

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

Jan-18 Jan-19 Jan-20

Auto Asset-Backed Securities Yield Spreads

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%


Mortgage-Backed Securities Yield SpreadsAgency MBS AAA CMBS Index

ABS spreads may currently represent better relative value vs. high-quality corporates

CMBS fundamentals remain solid, provide better relative value compared to MBS

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%


Corporate Notes (1-5 yr A-AAA) Yield Spreads

Agencies spreads remain at historically tight levels

Corporate spreads are also at historically tight levels

© PFM 19

$67

$0

$10

$20

$30

$40

$50

$60

$70

$80

2013 2014 2015 2016 2017 2018 2019

Bill

ions

Taxable Municipal Bond Issuance

Taxable Municipal Securities Are Attractive, but Supply Constrained

Source: Bloomberg BVAL yield spread, as of January 31, 2020.

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

0.50%

0.55%

0.60%

0.65%

Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

Yield Spread on 5-Year AA-Rated Taxable Municipals

The low interest rate environment and flat yield curve has prompted a surge

in taxable municipal advanced refundings.

© PFM 20

Fall in Rates Leads to Strong Absolute Returns in January

Source: ICE BofAML Indices. ABS indices are 0-5 year, based on weighted average life. MBS is the ICE BofAML 15-Year MBS Index.

0.87%

0.62%

0.85%

0.71%

0.86%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

U.S

. Tre

asur

y

Agen

cy

Agen

cy M

BS

ABS

(AAA

)

Cor

p (A

-AAA

)

1-5 Year Index ReturnsU.S. Treasury Agency Agency MBSABS (AAA) Corp (A-AAA)

0.13%

0.54%

1.39%

2.23%

3.20%

3.54%

0%

1%

1%

2%

2%

3%

3%

4%

4%

0-3

Mon

ths

1-3

Year

s

3-5

Year

s

5-7

Year

s

7-10

Yea

rs

10-1

5 Ye

ars

Treasury ReturnsJanuary 2020

© PFM 21

Fixed-Income Index Returns

Source: ICE BofAML Indices. Returns greater than one year are annualized.

January 31, 2020 Effective Duration Yield YTD 1 Month 3 Month 1 Year 3 Years 5 Years

1-3 Year IndicesU.S. Treasury 1.78 1.44% 0.54% 0.54% 0.72% 3.83% 1.98% 1.40% Agency 1.44 1.39% 0.43% 0.43% 0.67% 3.63% 2.06% 1.50% Corp A-AAA 1.73 1.79% 0.54% 0.54% 0.93% 4.85% 2.86% 2.23% ABS (0 to 3 Years) 1.14 1.76% 0.57% 0.57% 0.83% 3.80% 2.40% 1.87%

1-5 Year IndicesU.S. Treasury 2.53 1.41% 0.87% 0.87% 0.91% 4.77% 2.35% 1.65% Agency 1.92 1.37% 0.62% 0.62% 0.79% 4.11% 2.25% 1.65% Corp A-AAA 2.51 1.80% 0.86% 0.86% 1.22% 6.21% 3.41% 2.63% MBS (15 Years) 2.81 1.91% 0.85% 0.85% 1.22% 5.67% 2.98% 2.13% ABS (0 to 5 Years) 1.39 1.79% 0.71% 0.71% 0.90% 4.17% 2.53% 1.98%

Master Indices (Maturities 1 Year and Greater)U.S. Treasury 6.82 1.55% 2.56% 2.56% 1.62% 9.22% 4.17% 2.35% Agency 4.21 1.54% 1.57% 1.57% 1.23% 7.13% 3.55% 2.33% Corp A-AAA 7.85 2.35% 2.45% 2.45% 2.60% 13.22% 6.12% 4.06% MBS (0 to 30 Years) 2.87 2.30% 0.72% 0.72% 1.06% 6.39% 3.56% 2.58% Municipals 6.84 1.60% 1.79% 1.79% 2.31% 8.85% 5.14% 3.60%

© PFM 22

Sector Our Investment Preferences CommentsC O M M E R C I A L P A P E R

/ C D• Money market credit spreads have compressed even with the pick-up in

issuance.

T R E A S U R I E S • The U.S. government is increasing net issuance over the coming months to cover tax refunds; this increase in supply has made T-Bills more attractive.

• Given tight spreads in other sectors and the potential for lower rates later in 2020, T-Notes offer attractive yield.

T-BillT-Note

F E D E R A L A G E N C I E S • Bullet valuations remain near historical tights across the curve and continue to trade in a relatively narrow range. New issues should be evaluated for opportunities to add relative value; otherwise, Treasuries should be preferred.

• Callable spread pick-up vs. bullets remains well below recent averages with little chance for outperformance. Accounts should favor bulleted structures vs. callable.

BulletsCallables

S U P R A N A T I O N A L S• Spreads remain anchored across the curve. New supply has emerged, but

greater market demand resulted in little movement in spreads. New issues should be evaluated for opportunities to add relative value.

C O R P O R A T E S • Solid economic data, an accommodative Fed, and positive technicals 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.

FinancialsIndustrials

S E C U R I T I Z E D • AAA-rated ABS yield spreads have tightened to near record lows. Consumer ABS fundamentals remain solid; however, tight valuations will make it difficult to see outperformance.

• A rally in Treasuries has increased prepayment risk for MBS. This, combined with a slight uptick in volatility, resulted in YTD underperformance in MBS. However, MBS spreads are on the wide-end of recent ranges relative to other sectors, which may present a buying opportunity going forward.

• Agency CMBS spreads have narrowed in 2020. The sector has good relative value compared to other government sectors especially in shorter maturities.

Asset-BackedAgency Mortgage-Backed

Agency CMBS

M U N I C I P A L S • Value in new issue taxable deals has decreased due to high investor demand.

Negative Slightly Negative Neutral Slightly

Positive Positive

Fixed-Income Sector Outlook – February 2020

Current outlook Outlook one month ago

© PFM 23

New or Topical Material

© PFM 24

Current Expansion Features “Mini-Cycles”

Source: Bloomberg & Wall Street Journal, as of 01/31/20.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Conference Board U.S. Leading Index of Ten Economic Indicators (YoY)

Eurozone debt crisis, U.S. debt ceiling, U.S. downgrade

China devaluation & slowdown, oil in the $20s, deflation fears

Fed rate hikes, trade war

?

Recession

© PFM 25

Retail Sales Show Modest Growth in December

Source (top): U.S. Census Bureau, as of 12/31/2019. Source (bottom): Bloomberg.

retail+0.3%

auto and other motor vehicles-1.3%

clothing and clothing accessories+1.6%

furniture and home furnishings+0.1%

buildingmaterial+1.4%

food and beverage stores+0.4%

gasoline stations+2.8%

-2.0%

1.4%

-0.5%

1.8%

0.4% 0.5% 0.4% 0.7% 0.6%

-0.4%

0.3% 0.3% 0.3%

-3%

-2%

-1%

0%

1%

2%

Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

Retail Sales

December 2019

© PFM 26

Robust U.S. Job Growth in January

The U.S. economy added 225,000 jobs, exceeding expectations of 165,000 for the month

• The unemployment rate edged higher to 3.6%

• Wage growth rose 3.1%, better than the 2.9% increase in December

Labor participation rose to 63.4% as more Americans entered the workforce amid low unemployment and faster wage gains.

Source: Bloomberg, as of January 2020.

181k 192k

251k227k

193k 179k

223k

177k

225k

0k

50k

100k

150k

200k

250k

300k

2012 2013 2014 2015 2016 2017 2018 2019 Jan 20

Average Monthly Job Growth

0k

100k

200k

300k

400k

500k

Jan '15 Jan '16 Jan '17 Jan '18 Jan '19 Jan '20

Monthly Change in Non-Farm PayrollsNonfarm Payrolls 12-Month Moving Average

5.7%

4.9% 4.7%

4.1% 4.0%

3.6%

3%

4%

5%

6%

7%

Jan '15 Jan '16 Jan '17 Jan '18 Jan '19 Jan '20

Unemployment Rate

© PFM 27

46

48

50

52

54

56

58

60

62

Jan-

18

Apr-1

8

Jul-1

8

Oct

-18

Jan-

19

Apr-1

9

Jul-1

9

Oct

-19

Jan-

20

ISM Manufacturing PMI

Manufacturing Sector Bounces Back

Source: Bloomberg, as of January 2020.

Level Delineating Expansion & Contraction

46

48

50

52

54

56

58

60

62

Jan-

18

Apr-1

8

Jul-1

8

Oct

-18

Jan-

19

Apr-1

9

Jul-1

9

Oct

-19

Jan-

20

ISM Non-Manufacturing PMI

The rebound in manufacturing was

driven by gains in new orders, production, and

deliveries.

© PFM 28

Trade Tensions Span Worldwide

Source: Bloomberg, WTO, as of 12/31/2019. Trade disputes arise when one government believes another government is violating an agreement or commitment it has made in the World Trade Organisation (WTO).

-40%

-20%

0%

20%

40%

2001 2004 2007 2010 2013 2016 2019

U.S. Trade Flows Soften

RecessionExports YoYImports YoY

China23%

Mexico18%

Canada16%

Japan7%

Germany7%

U.S. Import Destination YTD

3516

2014

1111

85

2

2023

86

84

65

4

European UnionChina

CanadaSouth Korea

IndiaBrazilJapan

ArgentinaAustralia

U.S. Trade DisputesAgainst U.S. Brought By U.S.

Canada24%

Mexico21%

China9%

Japan6%

United Kingdom

6%

U.S. Export Destination YTD

© PFM 29

U.S. Treasury Yields – Where are We Now?


0

50

100

150

200

250

300

0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00%

Freq

uenc

y (d

ays)

2-Year U.S. Treasury YieldJanuary 2010 - January 2020

Current Yield = 1.31%73rd Percentile

020406080

100120

1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00%

Freq

uenc

y (d

ays)

10-Year U.S. Treasury YieldJanuary 2010 - January 2020

Current Yield = 1.51%1st Percentile

© PFM 30

Federal Reserve’s Balance Sheet Expands

Source: PFM, Bloomberg, The Federal Reserve, FRB of St. Louis, as of 1/28/20.

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

2007 2010 2013 2016 2019

(trill

ions

)

Excess Reserves Shrunk amid Fed UnwindBalance Sheet Runoff Starts

$2.0

$2.1

$2.2

$2.3

$2.4

$2.5

Dec-17 Jun-18 Dec-18 Jun-19 Dec-19

(trill

ions

)

Fed Treasury Holdings

$0

$1

$2

$3

$4

$5

2007 2009 2011 2013 2015 2017 2019

(trill

ions

)

Fed's Balance Sheet AssetsTreasury Mortgage-BackedFederal Agency Other

QE3QE2

(in billion) Treasury Holdings

MBS Holdings

Total Fed Assets

Dec 2017(Peak) $2,454 $1,765 $4,449

Jan 2020 $2,381 $1,400 $4,146

Permanent Open Market Operations• Fed plans to purchase approximately $60 billion Treasury

bills per month at least into Q2 2020.

© PFM 31

The Fed’s Economic Projections – December 2019

Source: Federal Reserve, as of September 2019. Green denotes an improved projection in June compared to March, red for worse.

Indicator2019 2020 2021 Longer run

Sept. Dec. Sept. Dec. Sept. Dec. Sept. Sept.

Real GDP (YoY) 2.2% 2.2% 2.0% 2.0% 1.9% 1.9% 1.9% 1.9%

Unemployment Rate 3.7% 3.6% 3.7% 3.5% 3.8% 3.6% 4.2% 4.1%

PCE Inflation (YoY) 1.5% 1.5% 1.9% 1.9% 2.0% 2.0% 2.0% 2.0%

Core PCE (YoY) 1.8% 1.6% 1.9% 1.9% 2.0% 2.0% - -

Federal FundsRate (Median) 1.9% 1.6% 1.9% 1.6% 2.1% 1.9% 2.5% 2.5%

© PFM 32

Federal Reserve May Be on Hold for Foreseeable Future

Source: Federal Reserve and Bloomberg. Individual dots represent each Fed members’ judgement of the midpoint of the appropriate target range for the federal funds rate at each year-end. Fed funds futures as of 12/11/19.

0%

1%

2%

3%

4%

Fed Participants’ Assessments of ‘Appropriate’ Monetary Policy

Dec-19 FOMC Projections

Dec-19 Median

Fed Funds Futures

2019 2020 2021 Longer Term2022

History of RecentFed Rate Moves

Dec ’19 1.50 – 1.75%

Oct ’19 1.50 – 1.75%

Sept ’19 1.75 – 2.00%

July ’19 2.00 – 2.25%

Dec ’18 2.25 – 2.50%

Sept ’18 2.00 – 2.25%

Jun ’18 1.75 – 2.00%

Mar ’18 1.50 – 1.75%

© PFM 33

1-3 Year Index Returns



U.S. Treasury 1.78 1.44% 0.54% 0.54% 0.72% 3.83% 1.98% 1.40%

Agency 1.44 1.39% 0.43% 0.43% 0.67% 3.63% 2.06% 1.50%

Non-callable 1.67 1.48% 0.48% 0.48% 0.71% 3.80% 2.09% 1.50%

Callable 0.57 1.07% 0.23% 0.23% 0.54% 2.99% 1.92% 1.49%

U.S. Treasury/Agency 1.77 1.43% 0.54% 0.54% 0.72% 3.82% 1.99% 1.41%

Corp A-AAA 1.73 1.79% 0.54% 0.54% 0.93% 4.85% 2.86% 2.23%

Corp AAA 1.74 1.59% 0.49% 0.49% 0.83% 4.41% 2.48% 1.84%

Corp AA 1.62 1.68% 0.51% 0.51% 0.82% 4.54% 2.71% 2.07%

Corp A 1.77 1.83% 0.56% 0.56% 0.96% 4.97% 2.92% 2.30%

Corp BBB 1.78 2.07% 0.61% 0.61% 1.13% 5.91% 3.38% 2.85%

Corp/Govt 1.77 1.56% 0.55% 0.55% 0.80% 4.24% 2.30% 1.70%

ABS 0 - 3 1.14 1.76% 0.57% 0.57% 0.83% 3.80% 2.40% 1.87%

Corp/Govt/Mtge 1.76 1.57% 0.55% 0.55% 0.82% 4.26% 2.32% 1.71%

Supranationals 1.76 1.49% 0.58% 0.58% 0.78% 4.10% 2.31% 1.63%

© PFM 34

1-5 Year Index Returns



U.S. Treasury 2.53 1.41% 0.87% 0.87% 0.91% 4.77% 2.35% 1.65%

Agency 1.92 1.37% 0.62% 0.62% 0.79% 4.11% 2.25% 1.65%

Non-callable 2.27 1.47% 0.72% 0.72% 0.86% 4.39% 2.32% 1.68%

Callable 0.82 1.06% 0.29% 0.29% 0.59% 3.16% 2.03% 1.54%

U.S. Treasury/Agency 2.51 1.41% 0.86% 0.86% 0.90% 4.75% 2.35% 1.65%

Corp A-AAA 2.56 2.06% 6.33% 0.33% 0.81% 6.33% 3.22% 2.67%

Corp AAA 2.43 1.60% 0.75% 0.75% 0.98% 5.47% 3.01% 2.13%

Corp AA 2.26 1.70% 0.75% 0.75% 1.00% 5.50% 3.12% 2.39%

Corp A 2.58 1.89% 0.89% 0.89% 1.28% 6.42% 3.51% 2.71%

Corp BBB 2.65 2.21% 0.96% 0.96% 1.56% 7.93% 4.17% 3.44%

Corp/Govt 2.52 1.59% 0.87% 0.87% 1.04% 5.43% 2.79% 2.05%

MBS 15 Years 2.81 1.91% 0.85% 0.85% 1.22% 5.67% 2.98% 2.13%

ABS 0 - 5 1.39 1.79% 0.71% 0.71% 0.90% 4.17% 2.53% 1.98%

Corp/Govt/Mtge 2.40 1.65% 0.84% 0.84% 1.04% 5.52% 2.82% 2.09%

Supranationals 2.43 1.57% 0.84% 0.84% 0.97% 5.20% 2.84% 2.00%

© PFM 35

Disclosures

This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities.

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