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Exhibit 79: US 10-Year Yields and Term Premium Expected tapering from major central banks has contributed to higher long-term yields and bond term premiums. 10-Year Treasury Yield eT Risk-Neutral Yield Term Premium | 2011 2012 2013 2014 2015 2016 Data through December 31, 2016. Source: Investment Strategy Group, Bloomberg. Exhibit 80: US 10-Year Breakeven Inflation Rate and Consensus Inflation Rate Forecasts TIPS benefited from a recovery in breakeven inflation rates in 2016. % Annualized 3.0 10-Year Breakeven Inflation 10-Year Ahead Inflation Forecast 25 2.0 0.5 0.0 2011 2012 2013 2014 2015 2016 Data through December 31, 2016. Source: Investment Strategy Group, Bloomberg. We think that breakeven inflation rates have further room to rise as the concerns that depressed them last year fade. First, oil prices are recovering, reversing the persistent drag they had exerted throughout much of early 2016. Second, wages are firming and fiscal policy is being eased, dampening deflation worries. Finally, recession odds are falling as the drag from oil weakness and dollar strength fades. With breakeven inflation rates still below long- term consensus forecasts and the Federal Reserve’s target, we expect positive total returns from TIPS in 2017. Still, TIPS’ absolute returns are likely to be modest, as their eight-year duration will make it difficult for coupon income to meaningfully exceed principal losses as rates rise. Moreover, given TIPS’ unfavorable tax treatment (discussed at length in our 2011 Outlook), we continue to advise US clients with taxable accounts to use municipal bonds for their strategic allocation. We expect rates to continue to increase, albeit at a slower pace in 2017, as many of the forces that have restrained yields are slowly fading. US Municipal Bond Market Municipal bond holders were not immune from 2016’s about-face in US Treasury yields. Last October, municipal bonds were enjoying some of their best returns in years, only to be hit by losses arising from both rising interest rates and budding concerns about tax changes in the wake of the US presidential election. The abrupt redemptions of municipal bond mutual funds only exacerbated these losses, with the pace of outflows second only to the mid-2013 taper tantrum (see Exhibit 81). All told, municipal bonds suffered one of their worst years in recent history, with intermediate municipal bonds actually experiencing a rare loss (see Exhibit 82). Unfortunately, the near-term outlook remains challenging. As Exhibit 81 reminds us, mutual fund flows tend to be sticky in this asset class, with persistent periods of both buying and selling depending on the trajectory of interest rates. Based on historical episodes, there is scope for the current string of outflows to extend further. Moreover, clarity on tax policy will remain elusive for months, during which time headline risk will be significant. Even worse, a sizable reduction in the top individual tax rate for municipal bonds—if ultimately passed—could significantly shift the economics of owning them, leading to further sales. These fresh worries on tax policies Outlook | Investment Strategy Group 67 HOUSE_OVERSIGHT_014600