Hello and thank you for watching the Wasmer Schroeder Strategies quarterly update video for the second quarter of 2024.

My name is Tom Richmond; I'm Co Head of the taxable Wasmer Schroeder Strategies and I'll start by covering the macroeconomic environment and backdrop.

I'll be followed by my colleagues John Majoros and Jason Diefenthaler, who will provide updates on the taxable and tax-exempt bond markets, respectively.

Say that the macro backdrop over the course of the second quarter was quiet, as this first slide depicts, is hardly an overstatement.

As always, conditions did change, but in this case only very slowly and subtly, as this chart shows.

Inflation, everyone's favorite macroeconomic phenomenon over the past couple of years, did thankfully resume its downward trend, though only to the tune of a few tenths of a percentage point based on which measure you were looking at.

Similarly, the unemployment rate did inch slowly higher, but here again only to the tune of a couple of tenths of a percent, and labor force participation rates remain steady.

Estimates of real GDP growth for the quarter, which won't be released until the end of July, show an economy that remains steady when compared to the first quarter, probably slowing at the margin, but still performing at or above both the trend of the post financial crisis era and most estimates of its long-term potential.

This was due both, it seems, to consumers slowing their consumption, especially of goods, slightly, and businesses similarly slowing their pace of longer-term investments somewhat.

Global geopolitics, fortunately, were not a problem, but it does seem that these risks are likely starting to rise.

The second slide shows how the Federal Open Market Committee interpreted this general lack of movement in the incoming data and how the market in turn interpreted the FET.

The Fed, for its part, stayed very much on message, reiterating often that no reduction in its target for the Fed funds rate would be seriously debated until inflation data showed further progress toward its 2% long run target.

To drive home this implied higher for longer stance, the summary of economic Projections, or more familiarly, the dot plot released following the Feds meeting last month, showed that the median projection of the committee's members for policy rate cuts over the remainder of 2024 had fallen from three in March to one.

The money markets took this in stride and in response priced Fed funds higher across the curve as shown here.

Although this movement implied two rate reductions prior to year-end rather than just one, it seems clear today that the data has begun to show at least modest softening in the US economy late in the second quarter and into this third quarter.

And we do believe that some increased volatility may emerge in the coming quarter or two as these discussions regarding potential policy easing become more serious and the presidential election years.

Hopefully this means that this discussion will be much more interesting in three monthsÕ time.

With that, I'll now turn things over to John who will describe last quarter's taxable bond markets in more detail.

John.

Thanks, Tom.

And yes, my name is John Majoros and I Co lead the team of portfolio managers responsible for all of Wasmer Schroeder Strategy's taxable bond portfolios.

First, thank you for spending a few minutes with me as I go over what happened in the taxable bond market during the second quarter of 2024.

It was a relatively quiet period for the US Treasury market and when all was said and done, rates across the yield curve were slightly higher as the chart indicates with prices modestly lower.

The yield curve was slightly less inverted as shorter maturity bonds did slightly better than longer maturity bonds.

It remains very inverted though.

Based on the Federal Reserve's firm stance against near term rate cuts, interest rate volatility was relatively muted over the quarter, and it remains at a very low level from a historical perspective.

It would bend believability though to think that volatility will remain this low given the information flow challenge the market is likely to face going into your end, including expected volatility associated with the US elections.

Despite U.S.

Treasury prices being down over the quarter, most widely followed indices of bond market performance across the maturity spectrum managed to squeak out the positive return.

As this slide indicates.

This points out the power of being in non-treasury sectors where the income received during the period was higher.

This additional income really made the difference in second quarter results.

For our part, Wasmer Schroeder taxable strategies continue to do well against our respective benchmarks.

In this next chart, you can see the excess returns across major fixed income sectors moderated during the quarter for both taxable municipal and corporate bonds compared to a very strong showing in the first quarter.

Spreads certainly widened a bit for those sectors, but the fundamental and technical underpinnings of both markets still represent a tailwind, at least in our view.

Mortgages fared better in the second quarter after a rough first quarter as the positive carry helped bolster their return.

We do believe that mortgage-backed bonds look interesting, especially against other areas of the credit market.

As this chart indicates, yields across taxable fixed income still look compelling from a historical perspective, especially given where we are in the economic cycle and the likelihood that the next Federal Reserve move is a cut.

Though timing still remains uncertain.

And while short maturity parts of the market look particularly good, that yield is likely set to decline, making some maturity extensions attractive to potentially protect those yields.

One last thing I wanted to point out and something that the fixed income team broadly spends quite a bit of time on is assessing individual credit quality.

As this chart indicates, corporate credit has performed very well over the last few years.

Many corporations extended debt maturities and bolstered balance sheets when rates were much lower.

In addition, the strong economy, which has surprised many with its performance, continues to be a source of strength.

As this chart indicates, upgrades have outpaced downgrades during the last few years, except during 2020, which was the high point of the pandemic lockdowns.

All that said, this business cycle will likely get more difficult and variations in performance between individual companies and industries will likely increase compared to the last couple of years, which is why we're fortunate to have experienced corporate and municipal credit research analysts supporting decision making at the portfolio level.

So with that, thank you again for your time, and I'll send it over to Jason Diefenthaler.

Thanks, John.

My name is Jason Diefenthaler.

I oversee our tax-exempt strategies at Schwab Asset Management and thanks to you all for joining our market update.

I'll be reviewing the municipal bond market today.

We're going to look back over the second quarter of 2024 and we're also going to look forward towards the second half of this year.

Let's start by taking a look at the tax-exempt yield curve.

And there was notable movement in the shape of the yield curve during the quarter.

Tax exempt yields rose by 35 to 45 basis points out to 10 years, but we're close to unchanged on longer maturities and we can chalk up the movement in the Treasury market as being the primary driver of these higher yields as investors continue to grapple with changing expectations around the outlook for Federal Reserve rate cuts.

10-year tax exempt yields into June above 2.8%, which is about 60 basis points higher since the start of the year.

And as we noted in last quarters call, the slope of the muni yield curve remains inverted, meaning short term bonds are yielding more than bonds maturing out to 10 years.

And while this inversion did lessen during the quarter, it remains very unusual for our market, and it continues to impact our strategy positioning given that our preference is to underweight those lower yielding intermediate areas of the market by utilizing more of a barbell structure across our clientsÕ portfolios.

In terms of dominant market themes during the quarter, none was more prevalent than the supply of new bonds coming to market.

The the pace of new supplies running at a record pace this year with almost 250 billion issued in just the first six months alone.

And this heightened pace of supply is being driven by a few factors.

We did come into the year with a degree of pent-up loan demand from borrowers that have been sitting on the sidelines for the last two years.

Some issuers were simply waiting to come to market given the rapid rise in rates in 2022 and 2023.

And also there was a willingness to wait for the Fed to execute their policy pivot to rate cuts later this year, which of course has yet to materialize.

Countering this heavy supply has been what we'd call consistent, if not at times robust demand from investors.

Open and mutual funds.

Separate account managers have seen positive flows throughout most of this year and that's led to favorable trading conditions despite this higher supply.

Let's touch quickly on performance during the quarter.

As we observed in the previous charts, the belly of the yield curve, especially the five-to-10-year area of the market saw the largest yield increases and that did translate to underperformance for intermediate bonds relative to short and longer term maturities.

Lower rated credits were also in strong demand during the period.

This has been a consistent theme throughout the entire year.

Triple B high yield bonds have seen notable outperformance as credit spreads have tightened and that pushed some of the relatively riskier revenue bond sectors to outperform such as industrial revenue bonds, tobacco bonds, hospitals.

So now that we've covered the second quarter, let's talk about what we're paying attention to going forward.

And we do continue to see positive signals in terms of the relative value opportunities in the municipal bond market.

You need a treasury yield ratio on intermediate bonds did cheapen during the quarter.

Ratios from one to 10 years ended June higher and flatter than they have been during most of this year.

But that said, we don't have high confidence that ratios will continue to widen through the end of this year given how well the market has absorbed supply.

And we don't anticipate that this record pace of issuance during the first half of the year will continue during the second half.

So that sets us up for a more stable technical environment across the market, which we see is helping to maintain these current ratios.

And and while the election is of course something that we're paying close attention to, there are simply too many wild cards in play to let political backdrop influence our portfolio positioning in any material way at the moment.

What we can objectively say is that for investors in lower tax brackets, the decision to allocate capital to tax exempt or taxable bonds continues to be fluid given where ratios sit today.

And that decision is best made with the help of your advisor.

But as we can see from this taxable equivalent yield chart, investors in higher tax brackets can still make a compelling case for the value of the municipal tax exemption in today's market.

So with that, we're going to wrap up the Wasmer Schroeder Strategies quarterly update.

On behalf of Charles Schwab Asset Management, thank you for entrusting us to help you with your financial goals and we look forward to speaking with you next quarter.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. The material provided is for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. The statements contained herein are based upon the opinions of Charles Schwab Investment Management, Inc., dba Schwab Asset Management^®, and the data available at the time of the presentation which may be subject to change depending on current market conditions. This presentation does not purport to be a complete overview of the topic stated, nor is it intended to be a complete discussion or analysis of the topic or securities discussed. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Schwab Asset Management does not accept any liability for any loss or damage arising out of the use of all or any part of this presentation. This report should not be regarded by recipients as a substitute for the exercise of their own judgment and may contain numerous assumptions. Different assumptions could result in materially different outcomes. Please contact Schwab Asset Management for more complete information, including the implications and appropriateness of the strategy or securities discussed herein for any particular portfolio or client.  Some of the statements in this document may be forward looking and contain certain risks and uncertainties. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

Please refer to the Charles Schwab Investment Management Disclosure Brochure for additional information. Portfolio Management for the Wasmer Schroeder Strategies is provided by Schwab Asset Management, a registered investment adviser and an affiliate of Charles Schwab & Co., Inc. (“Schwab”). Both Schwab Asset Management and Schwab are separate entities and subsidiaries of The Charles Schwab Corporation. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. Investments in managed accounts should be considered in view of a larger, more diversified investment portfolio. 

Wasmer Schroeder Strategies are available through Schwab's Managed Account Connection® program ("Connection"). Please read Schwab's disclosure brochure for important information and disclosures relating to Connection and Schwab's Managed Account Services®. Wasmer Schroeder Strategies may be available on other platforms or directly for certain investors with different minimums and fee structures. The Managed Account Marketplace® (“Marketplace”) platform is not a program sponsored by Schwab. Marketplace is an open architecture platform that gives investment advisors and their clients’ access to separate account managers and turnkey asset management providers (TAMPs). Participating money managers (MMs) and TAMPs need to establish a contract and have system compatibility with Schwab in order to be in Marketplace. The MMs, TAMPs, and their investment strategies available in Marketplace are not evaluated by Schwab. 

There are risks associated with any investment approach, the Wasmer Schroeder Strategies have their own set of risks. The Wasmer Schroeder Strategies invests primarily in fixed income instruments and as such the strategies are subject to various risks including but not limited to interest rate risk, reinvestment risk, credit risk, default risk and event risk. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. 

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

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Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Tax‐exempt bonds are not necessarily an appropriate investment for all persons. Information related to a security’s tax‐exempt status (federal and in‐state) is obtained from third‐parties and Schwab Asset Management does not guarantee its accuracy. Tax‐exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax. 

​Mortgage-backed securities (MBS) may be more sensitive to interest rate changes than other fixed income investments. They are subject to extension risk, where borrowers extend the duration of their mortgages as interest rates rise, and prepayment risk, where borrowers pay off their mortgages earlier as interest rates fall. These risks may reduce returns.

About the Wasmer Schroeder Strategies: More than 35 years ago, the Wasmer Schroeder philosophy was founded on the principles of an unwavering commitment to service and a dedication to managing fixed income. Originally founded by Martin Wasmer and Michael Schroeder, and now managed by Schwab Asset Management, the Wasmer Schroeder Strategies have grown significantly. From the beginning, management of the Wasmer Schroeder Strategies has held steadfast in its spirit of collaboration. We remain dedicated to uncovering opportunities and delivering results for our clients by working together every step of the way. The Wasmer Schroeder Strategies portfolio management team takes a dependable, collaborative, and insightful approach in the management of active fixed income tax-exempt and taxable strategies.

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