1 2 Treasury Yield Curve-2017

Source: Bloomberg

3 Municipal Aaa Yield Curve-2017

Source: Bloomberg

4 Treasury vs. Muni Aaa Yield Curve –Jan 17

Source: Bloomberg

5 Treasury vs. Muni Aaa Yield Curve-Nov 17

Source: Bloomberg

6 Interest Rates – from 3000 BC

Source: Business Insider 7 Economic Growth – 2007-2017

Source: BEA & Bloomberg

8 Economic Growth – GDPNow Forecast

Source: Atlanta Fed GDPNow Model

9 U.S. Unemployment Rate U-3

Source: BLS and Bloomberg

10 U.S. Unemployment Rate U-6

Source: BLS and Bloomberg

11 U.S. Non-farm Payrolls (2007-Present)

Source: BLS and Bloomberg

12 Weekly Initial Jobless Claims(1967-Present)

Source: DOL and Bloomberg

13 Inflation (PCE Core YoY) – 2007-2017

Source: BEA & Bloomberg

14 Inflation (CPI Core YoY) – 2007-2017

Source: BEA & Bloomberg

15 Inflation (PPI Core YoY) – 2007-2017

Source: BEA & Bloomberg

16 Average Hourly Earnings (YoY) – 2007-2017

Source: BLS & Bloomberg

17 Equity Market (Dow) – 2009 (low)-2017

Source: Bloomberg

18 High Yield – 2012-2017

Source: Bloomberg

19 U.S. Econ Forecasts – Street

November 15, 2017

Source: Bloomberg

Q4 Q1 Q2 Q3 Q4 Q1 2017 2018 2019 2019 17 18 18 18 18 19

GDP 2.7% 2.2% 2.5% 2.2% 2.2% 2.0% 2.2% 2.4% 2.1% 2.1% (2.50%- 3.50%)

Core PCE 1.4% 1.5% 1.7% 1.8% 1.9% 1.9% 1.5% 1.7% 2.0% 2.0% 2.0%

(U-3) 4.2% 4.1% 4.1% 4.1% 4.1% 4.0% 4.4% 4.1% 4.1% 4.1%

Non-farm 193k 165k 160k 150k 150k 141k 171K 157k 134K 134K Payrolls

20 U.S. Interest Rate Forecasts - Street

November 15, 2017

Source: Bloomberg

Current Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19

Fed Funds - UB 1.25% 1.50% 1.60% 1.85% 2.00% 2.15% 2.30%

Fed Funds - LB 1.00% 1.24% 1.36% 1.58% 1.72% 1.90% 2.01%

3-mon Libor 1.42% 1.53% 1.67% 1.86% 2.02% 2.16% 2.33%

2-yr note 1.69% 1.66% 1.83% 2.00% 2.15% 2.29% 2.46%

10-yr note 2.34% 2.47% 2.58% 2.70% 2.80% 2.89% 3.01%

30-yr bond 2.80% 2.99% 3.11% 3.22% 3.32% 3.39% 3.47%

2s/10s Spread 66 81 75 70 65 60 55

21 22 Locations of the Banks

Source: The Federal Reserve

23 Fed Has a Dual Mandate  Maximize Employment  (i.e. – emphasis on economic growth)  Prefer to grow GDP in a 2.5%-to-3.5% range  3.0% in 3rd quarter  4Q Forecasts:  Atlanta Fed – 3.3%  NY Fed – 3.2%  Street – 2.7%  Stabilize Prices  Inflation not a problem at this time  PCE Core YoY target of 2.0%

 Currently (September)-1.33% 24 What’s the Fed Doing? – Interest Rates

 Interest Rate Policy  Began Rate Hikes in December 2015  Raised 4x by 25 bps  Currently at 1.00%-1.25% Fed funds target rate  Fed “expected to raise 25 bps in December  97.1% Chance  Two-to-three additional rate hikes in both 2018 and 2019  Normalized fed funds target of 3.00% (2.75%-3.25%)  Current Estimate is 3.89%  Fed-to-Taylor Spread of -264 bps  Interest on Excess/Required Reserves (IOER)/(IORR) – 1.25%  $2.3 trillion in Reserves at the Fed

25 What Do Traders Think?

Fed Fund Futures – Implied (Chance of 25 bps increase) – December

26 What’s the Fed Doing? – Balance Sheet

 SOMA is $4.2 Trillion ($2.4+ Treasuries/$1.8 MBS)  Reduction began last month (October 13)

Time Treasuries MBS Total Cum Tot Oct‐Dec 17 $6 b $4 b $10 b $30 b Jan‐Mar 18 $12 b $8 b $20 b $90 b Apr‐Jun 18 $18 b $12 b $30 b $180 b Jul‐Sep 18 $24 b $16 b $40 b $300 b From Oct 18 $30 b $20 b $50 b $450 b 2019 $30 b $20 b $50 b $1.05 t 2020 $30 b $20 b $50 b $1.65 t Source: New York Federal Reserve

27 FOMC – 2017 Voters

– Chair (2)  – Vice Chair* (4)  William Dudley – NY Fed President (2)  – Governor (1)  – Governor (3)  Randall Quarles – Governor** (Vice Chair – Supervision) (4)  Charles Evans– Chicago Fed President (2)  Patrick Harker– Philadelphia Fed President (4)  Robert Kaplan– Dallas Fed President (4)  – Minneapolis Fed President (1)

 On a 1-5 Scale with 1=Dove and 5=Hawk  2017 Score = 3.00 (Neutral)  *Retired in October  **Started in October 28 FOMC – 2018 Voters

 Janet Yellen – Chair (2) – will leave Chair in February  William Dudley – NY Fed President (2) – gone mid-year 2018  Lael Brainard – Governor (1)  Jerome Powell – Governor (3) Chair beginning in early February  Randall Quarles – Vice Chair for Supervision (4)  Loretta Mester– Cleveland Fed President (5)  – Atlanta Fed President (1)  John Williams– San Francisco Fed President (4)  Mark Mullinix– Richmond Fed First Vice President (4) (acting)  Unfilled Board Slots – 3 (2-if Yellen remains on Board)  Governor/Vice Chair/Governor-Community Bank Rep

 On a 1-5 Scale with 1=Dove and 5=Hawk  2017 Score = 3.00 (Neutral)

29 FOMC – More Newcomers?

 Mohamed El-Erian  Possible Vice Chair  Allianz Chief Economic Advisor

 Marvin Goodfriend  Economics Professor at Carnegie Mellon  Former Director of Research at Richmond Fed

 Michelle Bowman  Community Bank Position  Bank Commissioner for the State of

 John Taylor  Economics Professor at Stanford  Former CEA for the first Bush White House 30 31 Geopolitical  The Big Three “Problems”  North Korea  BSC Leadership  Hobby is launching ballistic missiles - Sea of Japan  China  Military Expansion  Investments Globally – especially in Africa  Island Building in South China Sea  Russia  Disruptions of Foreign Elections  Military Resurgence  Especially Naval Power  Naval Bases in Crimea 32 Political  EU  Is Frexit, Grexit, or Germxit Next?  Brexit Negotiations-major impact on the future of the EU  U.S. Leadership  Leadership’s Questionable Decisions  U.S. Ceding Leadership Role to China  TPP - Was Intended to Combat China’s Growing Economic Influence  Paris Climate Accord  No longer at the Table to have a Say  NAFTA  Are We in a New Age of Isolationism?  Debate that began in the late 90’s (1890’s) 33 More Things that Interrupt My Beauty Sleep

 Tax Reform – Not Just Tax Cuts  Corporate Tax Rate Needs to be Reduced  Simplification of Individual Income Taxes

 U.S. Deficit  To paraphrase Mr. Dirksen - “A trillion here and trillion there and pretty soon you are talking about some real money”

 $20,497,341,175,850 (US Debt Clock.org)  $169,375 debt per taxpayer  $62,824 debt per citizen

34 35 Holders of Municipal Bonds

Source: Federal Reserve & CreditSights

36 Weekly Municipal Bond Fund Flows

37 Municipal Bond Issuance (Supply)

Source: SIFMA

38 Tax Reform Implications for Municipals

Source: Barclays  House: Curtails (25-30% of market)  Advance Refunding (90+ days)  25% of the market  Private Activity Bonds  19% of the market  PABs -3%  501c3-16%  Tax-exempt Stadium Bonds  Tax Credit Bonds  Senate: Curtails  Tax Exempt Stadium Bonds  Advance Refunding 39 Tax Reform Implications for Municipals

 Demand – Likely to Increase  Higher brackets are not changing much  House – 39.6%  Senate – 38.6%  Fewer tax “shelters” for high income filers  Reduction/limitations  Mortgage Interest  State & Local Taxes  Medical  Supply – Could Decrease  Expected to be $380-$400 billion in 2017  Could be reduced to $250-$270 billion  Includes $70-$80 billion 40 Muni Returns vs. Other Asset Classes

41 Municipal Market Total Returns

42 More Municipal Market Total Returns

43 Muni Market Dashboard

44 Disclaimers

The opinions expressed are those of the presenters and not necessarily of Robert W. Baird & Co.

Past performance is not a guarantee of future results. Robert W. Baird & Co., Inc. Member SIPC

45 Sources:

 Bloomberg  Bank America Merrill Lynch  Barclays  Bloomberg Barclays Indices  Bureau of Economic Analysis  Bureau of Labor Statistics  Business Insider  CBO  U.S. Census Bureau  CreditSights  Department of Labor   Federal Reserve Bank of Atlanta – GDPNow Model  Federal Reserve Bank of New York– SOMA Account Holdings  SIFMA  USDebtClock.org

46