7 2023 OUTLOOK Fixed Income More Attractive Bonds suffered their worst performance in 40 years in 2022, with the Bloomberg Aggregate Bond Index down about 11% after partially recovering 1 from even steeper declines. But the inherent upside of a decline in fixed income prices is that bonds now offer their most attractive yields in more than ten years. Exhibit 5: Bond Yields at Their Highest Levels In A Decade Exhibit 5: Bond Yields at Their Highest Levels In A Decade %10 , d l e i Y8 “We are upbeat about the potential 6 for more 5.08 4 attractive 3.58 2 total returns 1.05 moving forward 0 and for bonds to -2 revert to their 10-yr Treasury (TSY) US Investment Grade Bonds traditional role 10-yr TSY minus expected inflation as a ballast Source: Bloomberg. Note: BBG Corp. Index used for investment grade bonds. As of December 14, 2022. 6 As of 12/14/2022. Source: Bloomberg. Note: BBG Corp Index used for IG bonds. in portfolios. For investors, it means that TINA (There is No Alternative to Equities) is over, ” with the focus now on generating income through higher yields. At a 3.5% yield, 10-year Treasuries offer greater income than the S&P 500’s 1.8% dividend yield. With these improved yields, we are upbeat about the potential for more attractive total returns moving forward and for bonds to revert to their traditional role as a ballast in portfolios. The Treasury market has endured extreme volatility in the past year. Historically, a yield curve inversion – when short-term yields are higher than long-term yields – has been a reliable predictor of recessions. As of mid- December, the yield curve was the most inverted it has been since the early 1980s. Looking ahead, we expect the yield curve to invert further in the first quarter of 2023 as markets price in peak rates and weaker economic data appears. The Treasury yield curve should normalize as markets price in an eventual economic recovery in the latter part of the year. We forecast a 10-year Treasury note yield in the 3.5%-4.0% range by the end of 2023. That’s close to where it is today, but investors should be prepared for significant volatility in the interim. 1 As of December 14, 2022.