© 2014 PFM Asset Management LLC PFM Asset Management LLC Monthly Market Update PA Association of Councils of Governments September 13, 2014 Presented By: PFM Asset Management LLC One Keystone Plaza, Suite 300 North Front & Market Streets Harrisburg, PA (717)

© 2014 PFM Asset Management LLC 22 Current Macro Investment Strategy Themes Growth Shows Signs of Acceleration Rates continue to have an upward bias Intermediate maturities affected most, while long rates are contained Yield curve remains steeply sloped Fed Policies in Transition Bond purchases phased out in October 2014 Fed Funds could rise modestly in mid-2015 New Fed tools (IOER, direct repo) yet to be fully exercised Inflation Remains Benign Wage rate growth is stagnant Modest global demand causes prices of headline commodities to rise Inflation remains below trend, but rising towards Federal Reserve targets Modest Global Economic Outlook Dislocations Continue in Money Market Space Europe out of recession, but growth will likely be moderate Emerging markets will be a moderate drag China growth will moderate Money market reform increased demand for short maturities Basel III and new liquidity requirements are pushing issuance longer-term Further reform of money market funds and repo market may cause disruptions

© 2014 PFM Asset Management LLC 33 U.S. Economy Surges in 2nd Quarter of 2014 In the second quarter, U.S. GDP was revised upward to a 4.2% annualized rate supported by increased business spending on new equipment and buildings, and increased household spending. Source: Bureau Of Economic Analysis Post Recession Average = 2.2% Bloomberg Survey of Economists

© 2014 PFM Asset Management LLC 44 Labor Market Momentum Slows U.S. job creation missed market expectations, adding only 142,000 net new jobs in August; this broke the streak of six straight months of job growth in excess of 200,000. The unemployment rate fell slightly to 6.1% on decreased labor market participation. Source: Bureau of Labor Statistics Unemployment Rate: 6.1%

© 2014 PFM Asset Management LLC 55 Underlying Employment Slack Recent FOMC meeting minutes have referenced persistent “labor market slack” as a key policy consideration. This can be seen by a combination of weekly hours worked and hourly earnings growth; both measures remain below pre-recession levels. Wage growth is also an important factor in the potential for future inflation growth. Source: Bloomberg, Bureau of Labor Statistics

© 2014 PFM Asset Management LLC 66 Consumers Continue to Support Growth Recent GDP readings have portrayed a significant contribution from the consumer sector. As Consumer Confidence has rebounded from its depths during the recession, so has spending. Consumer behavior offers a vital indication on the general direction of economic growth as Consumer Spending accounts for approximately 70% of overall GDP growth. Source: Bloomberg

© 2014 PFM Asset Management LLC 77 Jobless Claims– Further Sign of Improving Labor Market The four-week moving average of initial jobless claims has fallen to around 300,000, near post-recession lows, and continues to point to a strengthening labor market. Source: Bloomberg

© 2014 PFM Asset Management LLC 88 Inflation Remains Muted The personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of core inflation, continues to undershoot the 2% target; it advanced 1.5% year-over-year in July. The Core Consumer Price Index (CPI) registered 1.9% year-over-year growth in July. Source: Bloomberg

© 2014 PFM Asset Management LLC 99 Strong Momentum in Broad Business Spending U.S. durable goods orders surged 22.6% in July, the largest monthly increase on record, driven primarily by strong demand for aircraft. Source: Bloomberg

© 2014 PFM Asset Management LLC 10 Housing Lagging the Broader Economy While improving, the U.S. housing market is lagging the broader economic recovery in the U.S. Residential investment’s contribution to economic growth is near its lowest level since WWII. An encouraging sign has been the increase in new housing starts as the inventory of unsold homes continues to decline. Source: Bloomberg

© 2014 PFM Asset Management LLC 11 The yield curve continued to flatten in August, as long-term rates fell, supported by muted inflation expectations and strong demand from foreign investors. Yield curve remains steep by historical measures. U.S. Treasury Yield Curve Remains Steep Source: Bloomberg U.S. Treasury Yield Curve Yield Curve History 8/31/135/31/148/31/14 1-Mo Mo Mo Yr Yr Yr Yr Yr Yr Yr

© 2014 PFM Asset Management LLC 12 The rate normalization process that began in 2013 has tapered off even as the Fed’s “Quantitative Easing” bond purchase program winds to a close. Short-term rates remain anchored by Fed policy, intermediate-term rates moved modestly higher in August, while long-term rates continued their year-to-date decline. A Longer View of Treasury Yields 2 Year5 Year10 Year August August August August August August August August U.S. Treasury Yields Source: Bloomberg. As of August 31, 2014

© 2014 PFM Asset Management LLC 13 Fed Tapers Bond Purchase Program The Federal Reserve began tapering its $85 billion a month bond purchase program in December 2013, and has continued to taper at a $10 billion pace at each subsequent FOMC meeting. The FOMC has said it will end the program in October; market participants have now turned their attention to a change in monetary policy as it relates to the Fed Fund’s Rate. Source: Bloomberg, Bloomberg Survey of Economists

© 2014 PFM Asset Management LLC 14 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. Disclaimer