Sector Analysis By Natalie Regan Recently, the Federal Reserve announced another 75bps increase in the overnight rate.  The very next day, GDP came in negative once again.  Now with back-to-back negative GDP reports, the textbook definition of a recession, other additional concerning factors remain. We see a few problems in our economy right now (inflation, supply chain, etc.) but also have positives that don’t pair with a traditional recession: low unemployment and positive payroll growth, steady consumer spending, and positive earnings reported the past two weeks.  Inflation remains the center of attention with every move the Fed makes. While the Fed thinks they have reached a neutral rate, they say they will continue to raise rates this year another 100bps as originally planned.  On the other hand, markets seem to not believe Mr. Powell as the rally that started a few days before the press conference continued all week. The rally pushed bonds 15-25bps lower in yield across the belly of the curve. Quotes like, “The Fed is nowhere near done on curbing high inflation rate,” brought us back to pre-FOMC meeting yields for the moment. This presents an opportunity for banks that had been waiting to make a move and add to the portfolio while rates are still in upper 2s-3s. Banks are often at the mercy of their deposit inflows and outflows, causing them at times to miss opportunities in the market.  When rates are high, banks typically don’t have additional funds to invest. When rates are low, banks are typically swimming in cash.  Bond swaps and taking losses are strategies to consider in markets like these.  Rates are coming off their highs of the cycle, so now could be a good time to buy and extend.  A refresh of each sector can be helpful, especially when certain areas are presenting great opportunities for buying and selling.   Sector Analysis Treasuries 0-6mo is the steepest part of the curve (overnight rates are driving this) The curve between 2-10 years is negative sloping with inversions the whole way down (recession fears are driving this) The widely followed 2s vs 10s is the lowest it’s been in over two decades  Currently -30bps which is a level we haven’t seen since 2000.  The lowest it’s ever been is -56bps in April 2000. Agency Bullets Spreads have widened to +5-10bps inside of 5years Supply remains light with agency new issuance focusing on more defensive callable and step structures Municipals Municipals are very expensive in the short term (the sign to sell your lowest yielding short municipals) Extending in duration (10+ year maturity), while rates are still up but possibly looking forward to a falling rate environment, is advisable and the municipal sector is a good place to look, while not losing sight of credit quality Taxables remain strong and move with the market as their price is typically tied directly to a benchmark and spreads have widened  MBS 15YR pools continue to be favored as they extend slightly while providing nearly 70bps of spread with a 4.5yr average life CD’s Issuance has picked up over the past couple of weeks (refer back to comment about banks needing funds when rates are high) The bigger bank issuers have CD offers at up to +85bps inside of 5 years.  Investing options to consider in this market are: - Selling short-term municipals - Buying longer, high-quality municipals - Buying mid-term MBS pools and CDs Call us for specific ideas for your portfolio.

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