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Fun with Economics

WGFOA Spring ConferenceB. Craig ElderDirectorSenior Fixed Income AnalystRobert W. Baird & Co., Inc.

Please Note: Information in this presentation is as of April 8, 2016 or prior.

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10-Year Interest Rates – from 1790

Source: Goldman Sachs10 year taxable 3

Interest Rates – from 1522

Source: Business Insider10 year taxable

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Interest Rates – from 3000 BC

Source: Business Insider 5

Treasury Yield CurveSource: Bloomberg

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10-Year Treasury Constant Maturity YieldSource: St. Louis Federal Reserve

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U.S. Treasury SupplySource: Bloomberg

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Budget as a Percentage of GDPSource: Bloomberg

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U.S. DeficitsSOURCE: St. Louis Federal Reserve

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U.S. Historical Deficits - % of GDPSOURCES: Data from the Office of Management and Budget, Budget of the United States Government: Fiscal Year 2013, Historical Tables, February 2012; Congressional Budget Office, Updated Budget Projections: Fiscal Years 2012 to 2022: March 2012; and the Historical Statistics of the United States, Millennial Edition Online, Cambridge 2006. Compiled by PGPF.

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Foreign Holders of U.S. Treasury IssuesSource: Bloomberg

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Municipal Bond Yield Levels – HistoricalSource: Bloomberg

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Municipal Bond Yield Levels – After TaxSource: Bloomberg

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Municipal Bond Yield Levels – AAA vs. ASource: Bloomberg

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Agency Yield CurveSource: Bloomberg

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IG Yield LevelsSource: Bank of America Merrill Lynch & St. Louis Federal Reserve

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HY Yield LevelsSource: Bank of America Merrill Lynch & St. Louis Federal Reserve

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HY Yield CCC or Below Effective YieldsSource: Bank of America Merrill Lynch & St. Louis Federal Reserve

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German BUNDS Yield CurveSource: Bloomberg

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Negative Interest RatesSource: JP Morgan & Bianco Research LLC

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Fixed Income Sector Statistics Source: Barclays

Sector Rating MaturityDurationMod Adj Convexity

AverageCoupon Yield Spread Price

YTD TR

Treasury Aaa/AA+ 7.61 6.26 0.88 2.08% 1.25% N/A $105.69 3.80%

Agency Aaa/AA+ 5.40 4.03 0.05 2.52% 1.67% 56 $103.60 2.60%

MBS Aaa/AAA 5.55 2.97 (2.31) 3.67% 2.30% 26 $106.07 2.08%

Municipal Aa3/A+ 13.06 6.01 (0.87) 4.79% 1.84%/3.10% N/A $110.77 2.27%

Corporate A3/BBB+ 10.78 7.36 1.06 4.20% 3.12% 163 $106.47 4.80%

High Yield B1/B 6.61 4.20 (0.03) 6.61% 8.15% 660 $91.42 3.53%

HY Energy B1/B 6.97 4.73 0.27 6.46% 13.38% 1,132 $72.05 2.59%

Yields presented represent the prevailing market price as of 4/7/2016 and are not representative of a specific issue. The indices used in this report to measure and report performance of various sectors of the market are unmanaged and direct investment in indices is not available per Barclays.

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Fixed Income Total ReturnsSource: CreditSights

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Annual Total Return Ranking by Asset ClassSource: CreditSights

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Source: Walt Handelsman - Newsday

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Economic Growth – 1980-2015Source: BEA & Bloomberg

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Economic Growth – GDPNow ForecastSource: Atlanta Fed GDPNow Model

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Inflation (PCE Core) – 1990-2016Source: BEA & Bloomberg

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Inflation (Core CPI) 1980-2016Source: BLS and Bloomberg

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US Consumer

Retail Sales

Personal Income

Personal Spending

Personal Savings Rate

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US Retail SalesSource: Census Bureau and Bloomberg

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US Personal IncomeSource: BEA and Bloomberg

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US Personal SpendingSource: BEA and Bloomberg

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US Personal Spending vs. Personal IncomeSource: BEA and Bloomberg

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US Personal Savings RateSource: BEA and Bloomberg

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US Manufacturing

Industrial Production

Capacity Utilization

ISM Manufacturing

ISM Milwaukee Purchasers Manufacturing

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US Industrial ProductionSource: Federal Reserve and Bloomberg

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US Capacity UtilizationSource: Federal Reserve and Bloomberg

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ISM ManufacturingSource: ISM and Bloomberg

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ISM Milwaukee Purchasers ManufacturingSource: NAPM Milwaukee and Bloomberg

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US Housing

Historical 30-Year Mortgage Rates

Existing Home Sales

New Home Sales

Housing Starts

Building Permits

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30-Year Fixed Rate Mortgage AverageSource: St. Louis Federal Reserve

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Existing Home SalesSource: National Association of Realtors and Bloomberg

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New Home SalesSource: Census Bureau and Bloomberg

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Housing StartsSource: Census Bureau and Bloomberg

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Building PermitsSource: Census Bureau and Bloomberg

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Key to Economy – Innovative New Jobs

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Beneficiaries of Economic Innovation

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Weekly Initial Jobless Claims

Source: Department of Labor and Bloomberg

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Measures of Unemployment Source: Bureau of Labor Statistics

•U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force;

•U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force;

•U-3: Total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate);

•U-4: Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers;

•U-5: Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers; and 8.9% - 7.6%

•U-6: Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

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U.S. Unemployment Rate(s) U1-6Source: BLS

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U.S. Unemployment Rate U-3Source: BLS and Bloomberg

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U.S. Under-Employment Rate (U6)

Source: Bloomberg

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U.S. Non-farm Payrolls (1980-Present)Source: BLS and Bloomberg

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U.S. Non-farm Payrolls (1939-Present)Source: BLS and Bloomberg

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Monthly Change in U.S. Non-farm Payrolls Source: BLS and CreditSights

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12-Month Change in U.S. Non-farm Payrolls Source: BLS

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WI Employment – 12-Month ChangeSource: BLS

Area Employed Percentage Change

Employment

Appleton 2,000 1.7% 121,500

Eau Claire 700 0.8% 84,500

Fond du Lac 600 1.3% 47,600

Green Bay 1,400 0.8% 171,000

Janesville-Beloit 2,500 3.8% 67,600

La Crosse-Onalaska 400 0.5% 77,100

Madison 8,400 2.2% 390,100

Milwaukee-Waukesha-West Allis 3,100 0.4% 842,200Oshkosh-Neenah 1,900 2.1% 94,500

Racine -1,000 -1.3% 74,700

Sheboygan 1,200 2.0% 60,200

Wausau 700 1.0% 71,400

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Locations of the Federal Reserve BanksSource: The Federal Reserve

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FOMC – 2016 Voters

On a 1-5 Scale with 1=Dove and 5=Hawk 2016 Score = 3.1 or leaning to the hawkish side

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What’s the Fed Doing? Asset Purchases $4.2 Trillion ($2.4+ Treasuries/$1.8 MBS) Maturing TSY debt principal rolled to TSY auctions Agency and MBS maturing principal rolled into MBS

Not Likely to end until 2017 at the earliest

Interest Rate Policy 0.25%-0.50% Fed funds target rate Hike in was first since December 2008 Previously raised rates in June 2006 - to 5.25% from 5.00% Fed “dot plots” – two 25 bps rate hikes this year

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The Dot PlotsSource: CreditSights & The Federal Reserve

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Fed’s Holdings of U.S. T-Notes & BondsSOURCE: Bloomberg

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The Fed: Taxpayers Hedge Fund

Profits Remitted to Treasury: $97.0 Billion – FY 2014 $79.1 Billion – FY 2013 Average before Financial Crisis - $25 billion Unrealized Gain - $174 billion in 2014 Unrealized Loss - $53 billion in 2013

Pays Banks 0.50% on Reserves Earns 2%-3% on Holdings

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Taxpayer’s Hedge Fund?Source: Forbes & The Federal Reserve

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Source: app.hedgeye.Com

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Oil Prices CollapseSource: Bloomberg

WTI Prices

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U.S. Land Rig CountSource: BHI, Bloomberg, Baird

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US Energy Data Trend TrackerSource: CreditSights

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Single B Energy Yield CurvesSource: Bloomberg

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Moody’s Energy LSI

Liquidity Stress Index: SGL-4 / SGL More SGL-4 Companies the higher the index

Overall LSIMarch – 10.3% February – 9.0%

Energy LSIMarch – 31.6% February – 27.2%

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Oil Prices Collapse Adds to Default CountSource: S&P and Bloomberg

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Source: Clay Bennett.com

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What’s Do Traders Think? Fed Fund Futures – Implied (Chance of 25 bps increase) – April 8

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U.S. Econ Forecasts – StreetApril 8, 2016

Source: Bloomberg

Q1 16

Q216

Q316

Q4 16

Q117

Q217

2016 2017 2018

GDP(2.50%-3.50%)

2.1% 1.8% 1.8% 2.1% 2.4% 2.4% 2.0% 2.3% 2.2%

Existing Home Sales

5.3m 5.4m 5.5m 5.5m 5.5m 5.5m 5.5m 5.6m 5.6m

Industrial Production

-1.4% 0.4% 0.5% 1.8% 2.1% 2.2% 0.3% 2.2% 2.3%

Core PCE 2.0%

1.6% 1.6% 1.6% 1.7% 1.7% 1.8% 1.6% 1.8% 1.9%

(U-3) 4.9% 4.8% 4.8% 4.7% 4.6% 4.6% 4.8% 4.6% 4.7%

Non-farm Payrolls

215k 195k 180k 178k 173k 168k 196K 163k 146K

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U.S. Interest Rate Forecasts - StreetApril 8, 2016Source: Bloomberg

Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17

Fed Funds - UB 0.50% 0.65% 0.75% 0.95% 1.15% 1.35% 1.55%

Fed Funds - LB 0.25% 0.40% 0.49% 0.69% 0.88% 1.08% 1.28%

3-mon Libor 0.63% 0.76% 0.88% 1.07% 1.26% 1.50% 1.75%

2-yr note 0.70% 0.93% 1.08% 1.26% 1.45% 1.61% 1.80%

10-yr note 1.72% 1.92% 2.08% 2.24% 2.39% 2.53% 2.69%

30-yr bond 2.55% 2.74% 2.86% 2.99% 3.07% 3.19% 3.26%

2s/10s Spread 101 100 100 98 95 92 88

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Sources:

App.hedgeye.com BHI Bloomberg Bank America Merrill Lynch Barclays Indices – Total Return Chart Bianco Research LLC Bureau of Economic Analysis Bureau of Labor Statistics Business Insider ritholz.com CBO U.S. Census Bureau Claybennet.com CreditSights Federal Reserve Bank Federal Reserve Bank of Atlanta – GDPNow Model Federal Reserve Bank of New York– SOMA Account Holdings Federal Reserve Bank of St. Louis Goldman Sachs JP Morgan Moody’s National Association of Realtors OMB

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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