Favored sectors We expect U.S. Treasury yields to decline in 2023 during the economic recession and as investors anticipate eventual rate cuts from the Fed. Ultimately, • Long-Term Fixed Income we expect opportunities for many fixed-income asset classes to begin to 1 • Short-Term Fixed Income recover from the unprecedented losses of 2022. We believe that increasing • Municipal Securities exposure in long-term fixed income will provide an advantage before opportunities appear in lower credit exposure (see chart on previous page. We expect long-term yields will begin to decline well before we reach the peak in high-yield credit spreads — a pattern that repeated in the past three recessions. Investors’ focus in 2023 should remain on the Fed, whose interest-rate hikes typically overshoot and tip the economy into a recession. We already see this pattern repeating, and our targets anticipate lower short- and long-term interest rates by year-end 2023. Problematic backdrop for global bonds Sustained inflation pressure overseas should continue to push policy rates and long-term yields higher in developed markets outside the U.S. Nevertheless, higher U.S. rates are likely to keep U.S. markets more attractive and support the dollar's strength, at least until the U.S. recession pushes all U.S. interest rates and the dollar lower later in 2023. We are keeping our preference for U.S. fixed income over developed ex-U.S. markets. Two crosscurrents leave our outlook neutral on emerging market sovereign debt denominated in dollars, at least at the start of the year. The negatives include recessions among the developed economies and slow growth in global trade and the Chinese economy. Higher yields in these markets and well-contained sovereign credit spreads in the larger emerging economies offset the negatives enough for us to prefer holding long-term target allocations, at least until we expect global economic improvement, in the second half of 2023. Corporate bonds may experience a correction We believe investment-grade corporate issuers will enter 2023 from a position of strength with interest coverage ratios at all-time highs and debt maturities pushed out into the future. Downgrades on the scale of past recessions are unlikely for investment-grade issuers. However, longer-term credit deterioration could occur for issuers with severe earnings drawdowns, credit-negative capital allocation priorities, and longer-term destruction of business strength. Credit spreads (risk premium over Treasuries for investment-grade and high-yield corporate bonds are currently hovering near long-term averages, but we expect that increased volatility and a decline in corporate profits in the upcoming quarters will diminish the appetite for credit risk and cause spreads to widen. 1. Double-digit decline (-13.1%) in the Bloomberg U.S. Aggregate Total Return Bond Index year to date as of November 30, 2022 — the lowest figure since index inception in 1976 14 | 2023 Outlook Please see pages 25–27 for important definitions and risk considerations.