Fixed Income Market Trends & Relevance for Mortgage RatesSpeaker:

• Jay Ladieu

Fixed Income Markets & Mortgages Rates

Source: SSGA, J.P. Morgan DataQuery and Bloomberg Finance, L.P., data as of June 4, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

1

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

4.00

%

4-Jun-19

Primary / Secondary Spread GNMAII 30y current coupon nominal spread US 10y Treasury yield

2.12%

0.80%

3.41% FHA Mortgage Rate

0.49%

10y Treasury Yields Moving Higher with Growth

Source: SSGA, Bloomberg Finance, L.P., data as of November 19, 2018.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

2

%

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

US 10y Treasury yield

Pricing in fiscal stimulus expectations

US GDP YoY SA

Treasury Market 2016-2018

2y Treasury Yields Moving Higher with Tighter Monetary Policy

Source: SSGA, Bloomberg Finance, L.P., data as of November 19, 2018.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

3

%

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

US 2y Treasury yield

Treasury Market 2016-2018

“A long way from getting rates to neutral…The Fed’s ultra-accommodative policy to bring the economy out of the Great Recession is no longer needed” Fed Chairman Jay Powell Oct 2018

Fed Funds Rate

Source: SSGA, Bloomberg Finance, L.P., data as of December 31, 2018.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

4

3.50

%

3.00

2.50

2.00

1.50

1.00

0.50

0.00Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18

US 2y Treasury yield Fed Funds Rate

%

3.50

3.00

2.50

2.00

1.50

1.00Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18

3250

3000

2750

2500

2250

2000

1750

1500

US 10y Treasury Yield S&P 500 Index

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

%

Core PCE YoY Fed Target, Upper Bound

Inflation

Market Questions Fed Policy Mistake?

”I am concerned we are on the precipice of a policy mistake. We are good where we stand right now…” James Bullard, St Louis Fed Res Bank President Jan 2019

“Especially with inflation low and under control, we have the ability to be patient”

Jay Powell, Chair of the Federal Reserve Jan 2019

Source: SSGA, Bloomberg Finance, L.P., data as of June 5, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

5

%

3.50

3.00

2.50

2.00

1.50

1.00

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

3100

2900

2700

2500

2300

2100

1900

1700

1500

US 10y Treasury yield S&P 500 Index

Policy Mistake?

Fed Pivots Dovish

Dovish Policy Rhetoric

Event Risk

Trade Tensions & Tariffs

Economy

Growing at a slower rate

Limited upside to inflation

Fiscal stimulus fading

Brexit

Late cycle credit concerns

Monetary Policy

Dovish Pivot

Wait and see approach

Sustain the expansion

6

Is the neutral rate lower implying current policy is restrictive?

Fundamentals are not indicative of a recession, but does the market agree?

Negative sentiment, does behavioural feedback loop increase downside risk?

Source: SSGA as of June 5, 2019.

2019 U.S. Market Outlook

Source: SSGA, Bloomberg Finance, L.P., data as of June 5, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

7

3.50

%

3.00

2.50

2.00

1.50

1.00

0.50

0.00

-0.50

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

US 10y JGB 10y UK 10y GER 10y

Yie

ld D

iffe

ren

tial

, %

3.00

2.50

2.00

1.50

1.00

0.50

0.00

-0.50

-1.00

-1.50

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

US 10y - UK 10y

Global Growth Concerns

US 10y - GER 10y

Source: SSGA, Bloomberg Finance, L.P., data as of June 5, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

8

4.00

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

%

Pricing in fiscal stimulus

US 10y Treasury yield

Market fading benefits from fiscal stimulus

Fading Fiscal Impulse

Source: SSGA, Bloomberg Finance, L.P., data as of June 5, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

9

4.00

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

%

Pricing in fiscal stimulus

US 10y Treasury yield

Market fading benefits from fiscal stimulus

Fading Fiscal Impulse

Source: SSGA, Bloomberg Finance, L.P., data as of June 5, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

10

65 4.00

60

55

50

45

40

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

%

US Manufacturing PMI

Manufacturing

US 10y Treasury yield

Lower Yields Justified by Fundamentals?

Source: SSGA, Bloomberg Finance, L.P., data as of June 5, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

11

65 4.00

60

55

50

45

40

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

%

US Manufacturing PMI US Services PMI US 10y Treasury yield

Manufacturing

Lower Yields Justified by Fundamentals?

Services

Market pricing 2-3 rate cuts by 2020 Inflation & Inflation Expectations Remain Depressed

Growth Concerns

Source: SSGA, Bloomberg Finance, L.P., data as of June 5, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

12

%

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

US 2y Treasury yield Fed Funds Rate

%

2.50

2.00

1.50

1.00

0.50

0.00

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

US 10y Breakeven Inflation Rate US Core PCE YoY

%

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

US 10y Treasury yield

Market Uncertainty

US GDP YoY SA

Source: SSGA, Bloomberg Finance, L.P., data as of June 5, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

13

5.00 12

%

4.00

3.00

2.00

1.00

0.00

-1.00

-2.00

Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13 Jan-18

10

8

6

4

2

0

US 3m-10y yield spread Fed Funds Rate

?

Recession Indicator and Rate Cuts?

Source: SSGA, Barclays Live data as of June 3, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

14

450

400

350

300

250

200

150

100

50

0

ba

sis

po

ints

, b

p

U.S. Corporate Index GNMA Index Pan-European Corporate Index

Policy uncertainty, trade concerns and late cyclical credit dynamics

Aug 2011 - European sovereign debt crisis sparks contagion fears negatively impacting risk assets.

Feb 2016 – Price of oil declines over 50% from May 2015 – Feb 2016, combined with other factors causes credit spreads to widen materially. GNMA MBS outperform.

Uncertainty & Risk Premiums

Source: SSGA, J.P. Morgan DataQuery data as of June 4, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

15

bas

is p

oin

ts, b

p

80

75

70

65

60

55

50

45

40

35

30

4.75

4.5

4.25

4

3.75

3.5

3.25

3

2.75

2.5

2.25

2

1.75

1.5

Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19

%

GNMAII 30yr 3.0% UST Spread Nominal US 10y Treasury yield FHA MBS Rate

FI Market & Primary Mortgage Rates

Source: SSGA, J.P. Morgan DataQuery and Bloomberg Finance, L.P., data as of June 4, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

16

%

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

US 10y Treasury yield GNMAII 30y current coupon yield

FI Market & Primary Mortgage Rates

FHA MBS rate

Summary

• Cyclical peak in long term U.S. rates is behind us

• Neutral rates of interest are lower than expected

• Fed may be behind the curve

• Less restrictive monetary policy should offset late cycle deceleration

• If so, rates should remain low and environment supportive of risk assets

• MBS spreads should remain range bound

• BUT...recession risk has increased

• Behavioral feedback loop is powerful

Source: SSGA as of June 6, 2019.

There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

17

Disclosure

All the information contained in this document is as of date indicated unless otherwise noted. The information provided does notconstitute investment advice and it should not be relied on as such. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The views expressed in this material are the views of State Street Global Advisors as of June 6th, 2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

© 2019 State Street Corporation. All Rights Reserved.

2573881.1.1.AM.INST

06/30/2020

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