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Financial markets were largely range-bound in the first quarter, although U.S. equities continued the rally that began in November 2016. Price action was driven primarily by developments in Congress, with earlier hopes for a pro-growth policy direction later giving way to concerns that the implementation of the Republican Party’s agenda will prove more difficult than first thought. Economic data surprised to the upside in many instances, reinforcing the positive sentiment in risk markets. The hawkish rhetoric from Federal Open Market Committee (FOMC) members in late February culminated in an orderly increase of the federal funds target range from 0.50%-0.75% to 0.75%-1.00% at the March meeting.
Money market rates adjusted higher as well, while participation in the U.S. Federal Reserve’s Overnight Reverse Repurchase Agreement Facility remained elevated as demand for high quality, liquid assets continued to outstrip supply. Treasury bill supply was inconsistent throughout the quarter, with a sharp reduction in early March exacerbating the demand for government securities.
In acknowledgement of the significant supply/demand pressures in the market for short-duration government securities, we selectively added duration to take advantage of steepness in the money market yield curve. At the same time, we maintained a neutral duration relative to the peer group and held a strong liquidity profile to accommodate any unexpected outflows. The Portfolio returned 0.11% over the period.
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