July 18, 2017 | Fixed Income Strategy

Fixed Income Weekly

Interest Rates Volatility

Interest rates were volatile last week, with the 10-year Treasury note yield trading in a 10 bps range, driven down by Fed Chair
Janet Yellens perceived dovish testimony before the House on Wednesday and driven higher by her perceived hawkish
testimony before the Senate on Thursday. The coup de grace for lower yields was the weaker than anticipated retail sales and
consumer inflation numbers released on Friday that sent yields lower with the 10-year yield ending the week at 2.33% as it
raised doubts about how aggressive the Fed will be in raising interest rates going forward. Fed funds futures no longer expect
additional rate hikes this year with the next hike at the March 2018 meeting (62.4% probability).

The yield on the two-year note fell to 1.36%, creating a 2s/10s spread (slope of the yield curve) of 97 bps which is slightly
below the long-term average of 107 bps. The yield on the 30-year bond was slightly lower at 2.92% (see yield curve chart
below)

Source: Bloomberg

Similar to Treasury yields, fixed income sector yields were lower with high yield levels down the most falling 14 bps. (see the
table on the following page). High yield remains the best performing fixed income asset class this year and on a trailing 12-
month basis as investors continue to be rewarded for taking risk.

B. Craig Elder, Director

Fixed Income Senior Analyst
celder@rwbaird.com
312-609-5433
 July 18, 2017 | Fixed Income

Fixed Income Sector Total Return and Statistical Data 7/14/17

TR-12 YTD Yield Spread Price Coupon Mat Duration Convexity
Aggregate -0.51% 2.36% 2.55% 41 $102.38 3.06% 8.30 6.05 0.15
Treasuries -2.33% 1.80% 1.90% n/a $101.59 2.10% 7.65 6.21 0.86
Agencies 0.10% 2.19% 2.24% 49 $102.32 2.59% 5.69 4.39 0.28
MBS 0.07% 1.51% 2.86% 31 $103.48 3.53% 7.15 4.78 (1.74)
IG Corporates 1.43% 4.01% 3.17% 105 $105.71 4.01% 10.92 7.51 1.08
Municipals -0.31% 3.72% 2.28% n/a $109.01 4.74% 13.03 6.38 (0.82)
High Yield 10.03% 5.23% 5.61% 365 $101.55 6.46% 6.28 3.87 (0.30)
Source: Bloomberg Barclays Indices

Corporate Bond Market Comments

Investment-grade corporate bonds yields fell last week to 3.17% with spread levels falling 2 bps to 105 bps over comparable
maturity Treasury debt as investors poured money ($2.3 billion) into investment-grade mutual funds. High yield spreads were
tighter by 5 bps to the 365 bps level and yield levels fell 14 bps to 5.61%, despite investors pulling $1.1 billion from high yield
mutual funds.

Sources:
Bloomberg: Bond News
Bloomberg Barclays Indices
CreditSights: Monday Meeting Notes Everything Rally Returns. July 16, 2017.

For more information please contact your Financial Advisor.

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Appendix Important Disclosures

Some of the potential risks associated with fixed income investments include call risk, reinvestment
risk, default risk and inflation risk. Additionally, it is important that an investor is familiar with the inverse
relationship between a bonds price and its yield. Bond prices will fall as interest rates rise and vice
versa.

When considering a potential investment, investors should compare the credit qualities of available
bond issues before they invest. The two most recognized rating agencies that assign credit ratings to
bond issuers are Moody's Investors Service (Moodys) and Standard & Poor's Corporation (S&P).
Moodys lowest investment-grade rating for a bond is Baa3 and S&Ps lowest investment-grade rating
for a bond is BBB-.

This is not a complete analysis of every material fact regarding any sector, municipality or security. The
opinions expressed here reflect our judgment at this date and are subject to change. The information
has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. It is
strongly recommended that an investor discuss with their financial professional all materially important
information such as risks, ratings and tax implications prior to making an investment. Past performance
is not a guarantee of future results.

This report does not provide recipients with information or advice that is sufficient on which to base an
investment decision. This report does not take into account the specific investment objectives, financial
situation, or need of any particular client and may not be suitable for all types of investors. Recipients
should consider the contents of this report as a single factor in making an investment decision.
Additional fundamental and other analyses would be required to make an investment decision about
any individual security identified in this report.

ADDITIONAL INFORMATION ON SECURITIES MENTIONED HEREIN IS AVAILABLE UPON

REQUEST BY CONTACTING YOUR BAIRD INVESTMENT PROFESSIONAL.

Copyright 2017 Robert W. Baird & Co. Incorporated.