fixed income monthly market update · 2020-06-11 · 30-yr fixed mortgage rate (rt.) housing market...
TRANSCRIPT
© 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
Dec '18 Mar '19 Jun '19 Sep '19 Dec '19
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
Source: Bloomberg, as of 01/31/2020.
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
Source: Bloomberg, as of 01/31/2020.
U.S. Treasury Yield Curve
30Y
© PFM 14
Treasury Yields Resume Downtrend
Source: Bloomberg, as of 01/31/2020.
-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%
Dec '18 Mar '19 Jun '19 Sep '19 Dec '19
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%
Jan-18 Jan-19 Jan-20
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%
Jan-18 Jan-19 Jan-20
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?
Source: Bloomberg, as of 1/31/2020.
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
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
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
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
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.