State Street Global Advisors Second Quarter Cash Forecast

State Street Global Advisors Second Quarter Cash Forecast il Following the Fed s 25 basis point rate hike on ch 21, we expect at least two additional rate hikes of 25 basis points (bps) each in, with potential for a third hike should inflation pressure exceed the Fed s 2.0% target. The prime vs. government money market fund (MMF) yield differential has been rising. This spread could reach 30 to 35 bps in Q3, given widening Libor spreads resulting from market technicals with higher T-bill issuance and repatriation. Liquidity has remained strong on average in both strategies. If clients are considering a move back into prime funds we believe now is a good time to do so. T-bill issuance is likely to remain elevated in, supporting higher repo returns and reducing dependence on the Fed s Reverse Repurchase Agreement Program (RRP). Seasonal fluctuation tied to the il tax deadline may mute this effect in Q2. With market rates moving higher on expectations of further rate hikes it is important to keep an eye on the rate in certain deposit accounts. Libor spreads have risen significantly since late. This appears to be related to a variety of technical factors, such as higher T-bill issuance and repatriation of US corporations offshore savings. We do not believe it is a sign of weaker credit; on the contrary, credit appears strong at the financial institutions that issue assets held by prime money funds. At its ch meeting, the European Central Bank (ECB) adopted a neutral tone and left policy unchanged. While it may wind down its asset purchases this year, we believe its negative interest rate policy will persist at least through 2019. Fed Rate Hikes: A Return to Normal as Inflation Recovers At its ch meeting the Fed raised the target range for the federal funds rate by 25 basis points (bps) to 1.5% to 1.75%, and signaled that it could raise rates slightly faster in 2019. The Fed s median dot-plot predicted three rate hikes in, three in 2019 (up from two in the ember Fed statement), and two in 2020. Additionally, seven of 16 participants foresaw a fourth rate hike in (up from four of 16 participants at the ember meeting); only one participant would need to shift upward to increase the outlook to four rate hikes. Consistent with current Fed guidance, we foresee a total of at least three rate hikes in, of 25 basis points each, with a year-end Fed funds target range of 2.00% to 2.25%. We believe there is potential for a 4th hike in depending on inflation data. The Fed s press release noted a moderate rise in economic activity, down from a solid rise in its January release, adding that recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings, yet it stated that the outlook has strengthened in recent months. The Fed s median projection saw unemployment dropping to 3.6%, with economic growth of 2.7% and 2019 growth of 2.4%. After stubbornly weak inflation readings, the data now point to gradually rising inflation. The Fed expects inflation to move up in the coming months and to stabilize around the Committee s 2% objective over the medium term. The January inflation release surprised on the upside, leading to higher bond yields and fears of significantly higher inflation. ruary s print was in line with expectations, calming markets. ruary consumer price index (CPI) rose 2.2% year over year, while the core CPI index increased 1.8% year over year. Underlying the inflation data is a robust labor market, which appears to have reached the intersection between full employment and wage pressure. Anecdotal evidence from the Fed s Beige Book indicates that employers are having to boost wages to fulfill their hiring needs. In ruary, the market added 313,000 jobs. This exceeded analysts expectations, although a jump in labor-force participation is alleviating some of the wage pressure. Figure 1: Spot Overnight Index Swap (OIS) vs. 1y1y OIS % 1.20 1.00 0.80 0.60 0.40 0.20 Jul Source: Bloomberg, as of 03/12/18. Past performance is not a guarantee of future results.

Some investment firms are now projecting 4 or even 5 rate hikes in. We believe the data set is not yet adequate to support such projections, and that despite the January anomaly, inflation prints continue to support the Fed s existing plans for gradual future rate hikes. The futures market is predicting hikes in line with the Fed s dot plot with a level of confidence that we have not seen in recent years. At market close following the Fed s ch 21 press release, the futures market was pricing in an 82% chance of a 25 bps rate hike in e, and a nearly 50% chance that the target range reaches 2.0% to 2.25% in September. Likewise, the OIS forward yield spread increasingly demonstrates that the market is pricing in a high level of confidence that the Fed will continue its rate hikes as projected this year. (See Figure 1). We believe that money funds will largely absorb these increases in an orderly manner, with minimal impact on prime MMF net asset value (NAV), and that over time the excess return from prime funds will readily compensate for any minimal NAV fluctuation. Prime vs. Government MMFs Liquidity in MMFs remained high in Q1, with prime funds posting weekly liquidity in excess of 40% and government funds in excess of 60% on average. Through early-ch of, the yield differential between these strategies rose incrementally, to the 25 30 bps range. We believe this increase in yield is related to a number of factors, including greater T-bill issuance, repatriation on tax reform, and to a lesser degree the timing of the Fed meeting and the quarterend, causing Libor spreads to widen. Although significant uncertainty remains, we anticipate that the prime-togovernment yield spread could reach 30 to 35 bps in Q3. Facing the prospect of spreads widening and Fed hiking rates, portfolio managers may become more defensive, adding liquidity. This could mitigate some of the upward pressure on prime vs. government spreads. The gradual rise in prime fund assets under management (AUM) that we observed in the year after MMF reform has plateaued near US$450 billion. We think that clients inclined to move back into prime funds have already done so, and we expect minimal funds will shift from government to prime strategies in the near future. T-Bill Supply Supports Higher MMF Yields In welcome news for money fund investors, a significant increase in T-bill supply in late and early (see Figure 2) has put upward pressure on yields, supporting higher returns in both prime and government funds. Figure 2: T-Bills Outstanding by Month 2,500 2,000 1,500 1,000 500 0 Source: US Treasury, Bloomberg, as of 02/28/18. Sep Following resolution of the most recent US debt limit debacle, ruary saw US$111 billion in net new T-bill supply, bringing the total outstanding to US$2.078 trillion, up about 18.5% year-over-year. At times, the market is finding it challenging to digest this extra supply. There s reason to expect that T-bill issuance will generally remain elevated over the course of, with some seasonal fluctuation. Amid high market demand for short-term risk-free assets, the Treasury Borrowing Advisory Committee (TBAC) has advised the Treasury to boost issuance of short-term debt. Further, the debt ceiling has been suspended until 2019, so Congressional brinksmanship around that issue should not affect T-bill issuance this year. Greater T-bill supply has boosted collateral and returns on the repo market, prompting money funds to decrease use of the Fed s Reverse Repurchase Program (RRP; see Figure 3: Federal Reserve Reverse Repo Program Allotment). Over the past year the average balance has been approximately US$122 billion but in ruary the average balance has been US$12 billion. Nonetheless, the program continues to serve as a vital purpose at quarter ends, when a brief but meaningful supply-demand imbalance is caused by banks shrinking their balance sheets. As is typical in il the increase in T-bill supply will likely slow as tax receipts peak for the year. In mid-il, US$80 billion in Cash Management Bills (CMBs) are scheduled to mature out of the system. In the past, the corresponding lower issuance of T-bills during tax season has put downward pressure on yields during the second quarter, although with the current elevated T-bill supply this seasonal effect may be muted this year. State Street Global Advisors 2

Figure 3: Federal Reserve Reverse Repo Program Allotment 500 400 300 200 100 0 Libor Rises on Technical Factors The Libor-OIS spread began widening in late, from 10 bps in mid-ember to 25 bps by year end. This trend continued in Q1 of, with Libor jumping by 12% monthover-month in ruary, and the Libor-OIS spread pushing over 50 basis points by mid ch. (See Figure 4: 3-Month Libor vs. 3-Month OIS.) At that level, short-term borrowing was more expensive than at any time since the financial crisis. The Libor-OIS spread typically moves at a more gradual pace, although larger moves have occurred, such as in ember 2015 when the Fed implemented its first post-crisis rate hike, and in the summer of when the Fed signaled another ember rate hike and the MMF reform deadline was prompting a trillion-dollar exodus from prime funds. Figure 4: 3-Month Libor vs. 3-Month OIS % % 2.50 2.00 1.50 1.00 0.50 Libor (Left Axis) OIS (Left Axis) Sep Source: Federal Reserve, as of ch 12,. Yield Spread (Right Axis) Source: Bloomberg Finance, L.P., as of ch 9,. Past performance is not a guarantee of future results. OIS Overnight Index Swap. Commercial Paper (CP) Tier I is A1/P1 short-term rated, CP Tier II is A2/P2 short-term rated. 0.50 0.40 0.30 0.20 0.10 Libor-OIS widening can sometimes be a sign of deteriorating credit conditions (such as during the financial crisis, when the rate soared). We do not, however, believe that this credit repricing is driven by a shift in fundamental credit conditions. Outside of the money markets, bank credit spreads have only modestly widened year to date as rising rates and flattening front-end yield curves have hurt total returns on short-dated bank bonds. However these moves have not been commensurate in scale to the Libor and OIS moves. Further, bank equity prices have generally outperformed indices in recent months. We view this as a funding event, as opposed to a credit event. Mildly weaker credit conditions may have had a small impact, as did a technical supply-demand imbalance driven by regulatory balance sheet constraints in the money markets. Overall, however, credit conditions are strong at the large financial institutions that are the largest investment counterparties for money funds, and our near-term forecast reflects this stability. Instead, the current Libor-OIS widening appears to be largely rooted in a variety of technical factors. Some of these include: 1) repatriation of US corporations unremitted offshore earnings following tax reform, 2) a year-end effort by Global Systemically Important Banks (G-SIBs) to constrain lending in order to avoid paying a higher G-SIB surcharge, and 3) rising T-bill issuance (as discussed above). The Fed s balance sheet normalization may also affect credit prices, although we believe the impact is minimal. Repatriation and Credit Spreads Following the Trump administration s tax reform, US corporations are expected to repatriate as much as US$1 trillion or more in savings currently held in financial instruments in offshore accounts. This is affecting both money funds and the broader fixed income markets. Demand for shorter-term assets has dropped as corporations pull their savings out, leading to rising borrowing costs for short-term debt issuers. Repatriation marks a permanent shift in fixed income markets. The tax reform eliminates the tax advantages that US corporations have benefitted from for the past several decades by leaving offshore earnings abroad. The reform imposes a mandatory one-time tax on existing overseas earnings, payable over 8 years, enabling companies to repatriate these funds immediately without a significant financial burden. This massive cash repatriation necessitates the dismantling of large offshore portfolios, the bulk of which are held in one- to five-year US Treasury, bank and corporate debt. State Street Global Advisors 3

Because these offshore portfolios are mainly invested in dollar-denominated assets, we do not expect repatriation to have a significant effect on the dollar. But as corporations unwind their portfolios and refrain from bidding for future corporate, bank and Treasury debt, yields are experiencing upward pressure. Constrained G-SIB Lending As the end of approached, several G-SIBs appear to have managed down their balance sheets to avoid paying a higher G-SIB surcharge. This pulled liquidity out of the short-term market, putting significant upward pressure on Libor. G-SIBs are subject to a capital surcharge of between 1% and 4.5%. The surcharge rate rises in 50 bps increments, depending on the bank s G-SIB score (an assessment of risk, based on size, complexity, short-term wholesale funding and other factors). Because the surcharge is based on a year-end G-SIB score, pressure tends to intensify in Q4. Fed Balance Sheet Normalization As of Q2,, the Fed s normalization policy is allowing as much as US$30 billion per month to roll off its balance sheet, with caps of US$18 billion for Treasuries and US$12 billion for mortgage-backed securities. At these levels, the Fed is halfway to its goal of increasing the caps to US$50 billion per month, which is scheduled to be reached in Q4 this year. Normalization is slowly shrinking the Fed s balance sheet (see Figure 5) and is gradually removing cash from the US banking system. As a result, banks will have to compete harder for available financing, putting some upward pressure on Libor, potentially translating into incrementally higher MMF yields. The Fed s policy has been transparent, measured and predictable, and while we are watching it closely we anticipate that it will continue to proceed smoothly. We believe that its impact on the market has been minor. In the medium term it could boost supply of repo collateral, increasing rates in that market. ECB Monetary Policy At its ch meeting, the European Central Bank (ECB) adopted a neutral tone and left policy unchanged. It confirmed that it would sustain its existing purchase program at a net 30 billion in assets through September 2019. It remained silent on further tapering, and continued Figure 5: Fed Balance Sheet, Total Assets 4,260 4,240 4,220 4,200 4,180 4,160 4,140 to leave its options open for additional asset purchases until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The ECB s statement noted strong and broad-based growth momentum in the euro zone, projected to expand in the near term at a somewhat faster pace than previously expected. It saw inflation converging toward its goal of below but close to 2% in the medium term, but cautioned that measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend. State Street Global Advisors (SSGA s) cash team anticipates that the ECB s forward guidance on its asset purchase program (APP) will not change before e or July at the earliest. While it may wind down its asset purchase this year, we believe its negative interest rate policy will persist at least through 2019. Conclusion Jan Source: SSGA, Bloomberg Finance, L.P., Federal Reserve as of ruary 28,. As Q2 begins, a number of factors point to higher returns for money fund investors. These include Fed rate hikes, higher T-bill issuance, and a Libor-OIS spread that is widening on technical factors. We believe that returns on prime funds will be particularly elevated; prime-togovernment spreads could climb to 30 to 35 bps in Q3, once seasonal factors related to the US tax deadline fade. Meanwhile, both liquidity and credit conditions for money fund counterparties remain strong. State Street Global Advisors 4

Glossary LIBOR: The London Interbank Offered Rate is the average of interest rates estimated by each of the leading banks in London that it would be charged were it to borrow from other banks. 3 Month LIBOR: The 3 month US Dollar (USD) LIBOR interest rate is the average interest rate at which a selection of banks in London are prepared to lend to one another in American dollars with a maturity of 3 months. Basis Point: A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. Spread: A LIBOR spread is any divergence between the London Interbank Offered Rate, called LIBOR, and another rate. The LIBOR often is compared with the overnight indexed swap rate, or OIS. LIBOR is the rate that banks charge one another for overnight loans, as calculated on a daily basis by the British Bankers' Association. Consumer Price Index (CPI): A consumer price index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households. Overnight Index Swap (OIS): An overnight indexed swap (OIS) is an interest rate swap where the periodic floating payment is generally based on a return calculated from a daily compound interest investment. The reference for a daily compounded rate is an overnight rate (or overnight index rate) and the exact averaging formula depends on the type of such rate. Net Asset Value (NAV): Net Asset Value is a mutual fund's assets less its liabilities, divided by the number of shares outstanding. ssga.com keting communication. State Street Global Advisors Worldwide Entities Australia: State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services Licence (AFSL Number 238276). Registered office: Level 17, 420 George Street, Sydney, NSW 2000, Australia. T: +612 9240 7600. 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