SVB Q2 2017 Economic Report

Q2
Quarterly
Economic
Report 2017

0417-0062KHEXP083117 SVB Asset Management | Quarterly Economic Report Q2 2017
Table of Contents
2
Thoughts from the desk 3
Overview 4
Domestic economy 6
Central bank monetary policy 12
Markets and performance 17
Global economy 26
Portfolio management strategy 30

Thoughts from the desk
Major global economies, directionally similar to the U.S., continue to post positive growth — though political events may add fuel to the engine or choke
off current momentum.
Across the pond, U.K. Prime Minister Theresa May invoked Article 50 to officially commence the EU divorce discussions, and key election outcomes
in France, Italy and Germany threaten to possibly increase the call to exit from the Eurozone. Nonetheless, slowdown in quantitative easing programs by
the European Central Bank, election uncertainties and early jockeying for favorable trade policies by member countries continue to weaken the British
pound and euro.
In the states, the FOMC maintained its current path toward normalization of monetary policies with an additional 25-basis-point increase to the
Federal Funds rate range in March — while signaling two additional hikes to follow by year-end. The Fed also cited further tightening in labor markets,
inflation “moving close” to their 2 percent longer-run objectives and the increasing likelihood of discontinuing its policy of reinvesting principal payments
from investment holdings. The Fed remains the only major central bank in a tightening mode, and it appears to stand alone for the foreseeable future.
Looking at Trump’s first 100 days in office, his administration has fallen short of his campaign promises — including the inability to reform the
Affordable Care Act, decreasing odds of enacting his plan for personal and corporate tax cuts by year-end and infrastructure spending plans that are
looking to be smaller than the original $1 trillion proposal. However, with elevated business and consumer sentiment — albeit a decline from post-election
highs — markets will continue to test new highs if the President is able to roll back the Dodd-Frank Act on banking regulation, pass any form of
infrastructure spending bill and work with Congress to pass a meaningful tax reform.
What’s ahead: with inertia for additional rate hikes, we continue to position duration for intermediate-to-long portfolios to be defensive. Investment-grade
bonds offer better downside protection than government securities as compressing credit spreads and relatively attractive coupons counter price declines.
As such, we favor allocations to this security type for our comprehensive portfolios.
3

Overview
Central bank monetary policy
  Economic activity has been healthy with Q4 GDP at 2.1 percent. The third
revision saw consumer spending improve to 3.5 percent, which continues
the solid readings over the past two quarters (4.3 percent in Q2 and 3
percent in Q3).
  Although Q4 was expected to fall from the large Q3 reading, the 2.1
percent figure is still in line with the 2 percent trend we have seen over the
past couple of years.
  Consumer sentiment fell in the first quarter as Trump’s pro-growth
pre-election themes of tax reform, deregulation and infrastructure spending
shifted to immigration and an unsuccessful attempt to repeal Obamacare.
  The three-month average for nonfarm payrolls for Q1 is 178,000. January
and February had healthy gains of over 200,000, while March came in
below expectations at 98,000.
  The unemployment rate has been at or below 5 percent for the past 19
months, and the U-6 underemployment rate fell below 9 percent for the
first time since 2007.
  Core PCE continues to trend closer to the Fed’s 2 percent target,
supporting the March 2017 decision to raise the Federal Funds rate.
  For the first time in nearly five years, the PCE price index rose above the
Fed’s 2 percent target to 2.1 percent for February.
Domestic economy
4
  After a decade of expansionary and accommodating monetary policy,
normalization is under way as a result of a strong domestic economy and
muted geopolitical concerns.
  At the March FOMC meeting, the Federal Reserve raised the Federal
Funds rate at consecutive meetings, citing confidence in the robustness of
the economy and its resilience to shocks. The rate increased by 25 basis
points to a range between 0.75 and 1.00 percent.
  Looking ahead, Fed members maintained a steeper path for interest rates
as inflation moved close to the Federal Reserve’s 2 percent target. Based
on median projections, policymakers expect at least two more rate
increases this year.
  Compared to other major economies, the Federal Reserve remains the
only central bank in a tightening mode. Other central banks continue to
weigh the effects of earlier stimulus measures on their economic
indicators.

Overview
5
Markets and performance Global economy
  As most major economies continue to post positive growth, political
events are primed to either accelerate the expansion or threaten to
cause economic uncertainty.
  Large-scale policy changes across a broad swath of the economy
have been discussed in the U.S. From rules on foreign workers to
health care and taxes, any actual changes to laws and regulations
could have the potential to boost economic growth and affect the
views of the Federal Reserve. At this point, it is unclear what will
transpire.
  The official notification of the United Kingdom’s exit from the
European Union comes as the British economy has proved to be
resilient. Economic conditions could change depending on the
outcome of the divorce settlement. An adverse resolution would hurt
both the British pound and the euro.
  Continental Europe continues to post economic gains, albeit at a
slow pace. Upcoming elections in France, Italy and Germany have
the potential to cloud financial conditions if parties advocating for
exiting the euro currency are able to advance their agenda.
  U.S. investment-grade and high-yield spreads continued their tightening trend
this quarter. At the sector level, financials outperformed as markets embraced
the possibility of a regulatory-lite environment for the banking sector.
  Solid gains continued in U.S. equities, lifted by an improving economic outlook,
rising consumer confidence and steady corporate earnings.
  After finishing 2016 as the best performing sector, crude oil lagged in the first
quarter of 2017. Diminishing optimism surrounding OPEC production cuts and
rising domestic inventories put downward pressure on prices.
  Corporate credit fundamentals remain solid overall, particularly among larger
and higher-quality companies. Credit metrics remained little changed from the
previous quarter across all sectors.
  The asset quality and capital levels of U.S. financial institutions remained solid
as evidenced by the FDIC Quarterly Banking Profile result. Notably, community
bank revenue and loan growth continue to outpace the banking industry.
  The Dodd-Frank Act was featured as a target in President Trump’s campaign
statements. While it is unclear whether a sweeping wholesale or partial repeal
could pass, the process will be complex and global systemically important
banks (G-SIBs) will remain subject to high international standards.

  Economic activity has been healthy with Q4 GDP at 2.1 percent. The third revision saw consumer spending improving to 3.5 percent, which continues the
solid readings over the past two quarters (4.3 percent in Q2 and 3 percent in Q3).
  The latest GDP figure supports the Federal Reserve’s case for raising the Federal Funds rate at their March 2017 meeting.
  Although Q4 was expected to fall from the large Q3 reading, the 2.1 percent figure is still in line with the 2 percent trend we have seen over the past couple of
years.
  In addition to the solid consumer spending figure, business equipment spending rose 1.9 percent — the first gain in five quarters.
GDP: Solid consumer and business spending
GDP and components
Source: Bureau of Economic Analysis (BEA), Congressional Budget Office (CBO) and SVB Asset Management. Data as of 12/31/2016.
Note: GDP values shown in legend are % change vs. prior quarter, on an annualized basis.
7
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Percent
Personal consumption Gross private domestic investment Net exports Government GDP
Source: Bureau of Economic Analysis (BEA), Congressional Budget Office (CBO) and SVB Asset Management. Data as of 3/30/17.
Note: GDP values shown in legend are % change vs. prior quarter, on an annualized basis.

Consumption: Optimism tapers
Consumption overview
Consumer sentimentRetail and food service sales
  Q4 data showed a 3.5 percent increase in consumer spending
quarter-over-quarter — an improvement over the prior quarter.
  Personal savings continued to creep down slightly. The recent downward
trend supports the view that consumers are feeling more confident in the
U.S. economy.
  Retail sales in the first quarter mostly were in line with expectations at 0.6
and 0.1 for January and February respectively. The lower figure shows a
slight slowdown in recent consumer spending compared to prior months.
  Consumer sentiment fell in the first quarter as Trump’s pro-growth
pre-election themes of tax reform, deregulation and infrastructure spending
shifted to immigration and a unsuccessful attempt to repeal Obamacare.
Source: Bloomberg and SVB Asset Management. Data as of 3/31/2017.
8
0.0
50.0
100.0
150.0
-10.0
-5.0
0.0
5.0
10.0
Percent
Percent
Personal consumption (LHS)
Personal savings (LHS)
Household debt to disposable income ratio (RHS)
5.0
10.0
15.0
20.0
25.0
250.0
300.0
350.0
400.0
450.0
500.0
Vehiclesales($millions)
Retail&foodservicessales
($billions)
Ex autos (LHS) Vehicle sales (RHS)
40.0
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
UniversityofMichiganConsumer
SentimentIndex
Average

Employment: Unemployment fell — for good reasons
Labor force participation rateEmployment landscape
Employment to population ratio
  The three-month average for nonfarm payrolls for Q1 was 178,000.
January and February had healthy gains of over 200,000, while March
came in below expectations at 98,000.
  The unemployment rate has been at or below 5 percent for the past 19
months.
  The unemployment rate fell for good reasons since it was in conjunction
with the labor force participation rate rising to 63 percent — the highest
since last March.
  The U-6 underemployment rate fell below 9 percent for the first time since
2007.
Source: U.S. Bureau of Labor and Statistics (BLS), Bloomberg and SVB Asset Management. Data as of 3/31/2017.
Note: The underemployment rate U-6, defined as persons marginally attached to the labor force, counts those who currently are neither working nor looking for work, but indicate they want and are available for a job
and have looked for work in the past 12 months.
9
0.0
2.0
4.0
6.0
8.0
10.0
12.0
62
63
64
65
66
67
68
Percent
Percent
Labor force participation rate (LHS) Unemployment rate (RHS)
55
56
57
58
59
60
61
62
63
64
Employment Population Ratio
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
-1,000.0
-500.0
0.0
500.0
1,000.0
Percent
Thousands
Non-farm payroll (LHS) Unemployment rate (RHS) U-6 (RHS)

U.S. housing: Firm footing
Home prices — indexed to 100Home sales and supply
Household formationHousing affordability
10
0
50
100
150
200
250
300
Thousands
Median home price FHFA purchase Case-Schiller 20 city
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0.0
50.0
100.0
150.0
200.0
250.0
Percent
Affordabilityindex
Housing affordability 30 -year fixed mortgage rates
-3000
-2000
-1000
0
1000
2000
3000
4000
Thousands
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Homesupply(months)
Homesales(millions)
Total sales (new & existing) Existing home supply

Inflation: Higher expectations
Crude oil and gasoline pricesCore PCE — % change from prior year
Wage growth
  Core PCE continues to trend closer to the Fed’s 2 percent target,
supporting the March 2017 decision to raise the Federal Funds rate.
  For the first time in nearly five years, the PCE price index rose above the
Fed’s 2 percent target to 2.1 percent for February.
  OPEC’s extension of their November decision to reduce output by 1.2
million barrels a day to 32.5 million for possibly another six months helped
stabilize oil prices and should apply some inflationary pressure.
  Wage growth continued the increase we saw in 2016, with the most recent
reading rising to 2.8 percent. If the trend continues, it will add to future
inflationary pressures and support the case for further rate hikes by the
Federal Reserve.
11
0.0
1.0
2.0
3.0
4.0
5.0
%Changefromprioryear
Core PCE Fed target Monetary policy threshold
-
1.0
2.0
3.0
4.0
5.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Priceperbarrel($)
Crude oil (LHS) Daily national average of gasoline prices (RHS)
1.5
2.0
2.5
3.0
3.5
4.0
Annualpercentagechange
Wages

Q2 2016 Q3 2016 Q4 2016 Q1 2017
A recovery in oil and hawkish Fedspeak
earlier in the quarter drive interest rates
temporarily higher. The yield on the 2-year
Treasury note hits 92 basis points in May.
Following Brexit, Treasury yields experience a
period of low volatility for much of the summer. We
also saw a flatter yield curve as evidenced by the
tighter spread.
Following a period of low volatility, interest
rates break out of trading ranges and head
higher on the heels of the presidential election
⎯ given prospects for greater fiscal spending.
Treasuries have remained range-bound
throughout most of the quarter, as investors
weighed the normalization of monetary policy
and inflation growth against geopolitical
concerns.
A confluence of factors in June brings rates
back down to H1 2015 levels. At center stage
is Brexit, which sent investors towards safe
havens such as U.S. Treasuries. A
disappointing employment report and a dovish
tilt from the FOMC meeting also lowers
probabilities for future rate hikes.
Solid employment reports and inflation readings
drive hawkish comments from Fed members and
temporarily increase probabilities for a rate hike. At
the September FOMC meeting, they announce a
stronger case for a rate hike, but decide to wait for
further evidence of continued progress towards
their objectives.
Continued strength in economic data ⎯
specifically, the decline in the unemployment
rate to a nine-year low, inflation hovering
around the Fed’s 2 percent target and
expectations for greater inflationary pressures
— prompts the Fed to raise the target range
for the Federal Funds rate at year-end.
The economy continued to grow at a moderate
pace with solid job gains, while the
unemployment rate has been little changed.
Inflation has increased in recent months and is
moving close to the FOMC’s 2 percent goal,
which has resulted in consecutive Federal
Funds rate increases.
Markets are focused on the broader
implications of Brexit, while central banks
such as the ECB and Fed stand ready to
provide liquidity if needed.
Looking ahead, the Fed continues to stress a
gradual approach to raising interest rates. The
Fed’s median forecast projects one interest rate
increase for the remainder of 2016.
OPEC agrees to cut production, sending oil
prices higher and creating more inflationary
pressure.
The Federal Reserve’s dot plot shows that
policymakers expect at least two more rate
increases in 2017 as economic conditions
evolve and warrant gradual increases.
Historical interest rates: Upward trajectory
13
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Percent
2-year Treasury yield 1-year Treasury yield

Central bank economic projections: Brighter outlook
14
2015 2016 2017 2018
Economic projections: United States
Change in real GDP 2.6% 1.6% 2.1% 2.1%
Unemployment rate 5.3% 4.8% 4.5% 4.5%
Core PCE inflation 1.4% 1.7% 1.9% 2.0%
Economic projections: Eurozone
CPI inflation 0.0% 0.2% 1.6% 1.7%
Unemployment rate 10.9% 10.0% 9.4% 8.9%
Economic projections: China
Change in real GDP 6.9% 6.7%
CPI inflation 1.4% 2.0%
Unemployment rate 4.1% 4.0%
Economic projects: Japan
CPI inflation 0.8% -0.1% 1.7% 1.9%
Source: Federal Reserve, European Central Bank, National People’s Congress of China, Bank of Japan. Data as of 3/31/2017.
Forecasts are not available for all periods.

-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Percent
Federal Reserve rate projections: Expectations accelerate
Source: Bloomberg and Federal Reserve.
Data as of 3/15/17. Percentages below the chart reference the median forecasted rate at the end of each period.
FOMC Dots Median 1.375 2.125 3.00 3
OIS – As of Meeting Date 1.276 10629 1.823
OIS – Latest Value 1.27 1.577 1.747
15

Japan Eurozone United Kingdom China United States
Central bank Bank of Japan European Central Bank Bank of England People's Bank of China Federal Reserve
Benchmark rate -0.10 percent 0.0 percent 0.25 percent 4.35 percent 0.75-1.00 percent
Current policy
Maintaining current easing
program, which includes
10-year rates near zero and
commitment to push inflation
above 2 percent.
Keeping previous cuts on
refinancing rate and deposit rate
with no change to its expanded
QE program.
After an August rate cut in
response to the EU referendum
outcome, no further action has
been taken.
While the benchmark rate has
been steady since February 2016’s
rate cut, the PBOC hiked other
borrowing rates in March 2017.
Considering additional rate hikes
after increasing rates by 25 basis
points in March.
Inflation
Unemployment 2.8% 9.5% 4.7% 4.0% 4.7%
Analysis
No material policy changes
expected for 2017 given recent
yen weakness.
No additional easing action
projected despite improving
conditions.
With a recent rise in inflation and
stronger-than-expected
macroeconomic conditions, the
next BOE move will be a rate
hike.
The economy has posted steady
results, though financial
conditions remain cloudy. Some
rates skewed higher after
increases in PBOC repo and
lending rates.
Anticipating additional interest
rate increases in 2017.
Easing Stable Tightening
Central banks: Poised higher
Source: Federal Reserve, European Central Bank, Bank of England, The People’s Bank of China, Bank of Japan, Bloomberg, SVB Asset Management
16
0.20%
0.0% 1.0% 2.0%
0.70%
0.0% 1.0% 2.0%
2.3%
0.0% 1.0% 2.0%
0.8%
0.0% 1.0% 2.0% 3.0%
2.1%
0.0% 1.0% 2.0%

Fixed income returns: Overview
18
Spread is based on option adjusted spread. Duration is based on modified duration. Data as of 3/31/2017.
Source: Bloomberg, BofA Merrill Lynch and SVB Asset Management.
Basic statistics Spread change Total return % Excess return %
Spread Yield Duration QTD YTD QTD YTD QTD YTD
1-3yr Treasuries 0.00 1.27 1.89 0.00 0.00 0.26 0.26 0.00 0.00
1-3yr agencies 10.00 1.38 1.81 -2.00 -2.00 0.31 0.31 0.11 0.11
0-3yr MBS 62.00 2.43 1.96 24.00 24.00 0.02 0.02 -0.25 -0.25
1-3yr ABS 58.00 1.74 1.28 -10.00 -10.00 0.47 0.47 0.32 0.32
1-3yr IG corporates 75.00 2.05 1.92 -13.00 -13.00 0.70 0.70 0.50 0.50
3-5yr IG corporates 94.00 2.70 3.71 -10.00 -10.00 1.21 1.21 0.73 0.73
5-10yr IG corporates 128.00 3.50 6.44 -4.00 -4.00 1.63 1.63 0.74 0.74
1-5yr high yield 455.00 6.16 2.40 -55.00 -55.00 2.54 2.54 2.24 2.24
1-3yr corporates by rating
AAA 28.00 1.59 2.03 -6.00 -6.00 0.48 0.48 0.26 0.26
AA 52.00 1.81 1.92 -10.00 -10.00 0.57 0.57 0.36 0.36
A 68.00 1.97 1.92 -10.00 -10.00 0.62 0.62 0.41 0.41
BBB 96.00 2.27 1.92 -19.00 -19.00 0.88 0.88 0.67 0.67
1-3yr corporates by sector
Financial 78.00 2.09 1.94 -15.00 -15.00 0.74 0.74 0.53 0.53
Industrials 71.00 2.00 1.92 -13.00 -13.00 0.69 0.69 0.48 0.48
Utility/energy 84.00 2.10 1.81 -9.00 -9.00 0.65 0.65 0.45 0.45

Total return comparisons
19
All returns above are on Total Return basis. 2017 returns are on an periodic basis up to 3/31/17. FI Credit refers to BofA/ML US Corporate Bonds 1-3 year Index; Treasury refers to BofA/ML US Treasuries 1-3
year Index; Gold refers to S&P GSCI Gold Spot; Crude Oil refers to Spot West Texas Intermediate Crude Oil; Wilshire refers to Wilshire 5000 Total Market Index; REIT refers to MSCI US REIT Index; S&P 500
refers to S&P 500 Index.
Source: Thomson Reuters, Barclays Live, BofA Merrill Lynch and SVB Asset Management.
Assetclassreturns
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD
US Treasury
6.67%
Crude Oil
78.00%
Gold
29.67%
Gold
10.23%
REIT
16.47%
Wilshire
33.06%
REIT
28.24%
S&P 500
1.40%
Crude Oil
44.80%
Gold
8.60%
Gold
5.53%
Wilshire
28.29%
REIT
26.97%
Crude Oil
8.15%
Wilshire
16.05%
S&P 500
32.39%
S&P 500
13.69%
REIT
1.30%
Wilshire
13.40%
Wilshire
6.20%
FI Credit
0.30%
S&P 500
26.46%
Wilshire
17.18%
REIT
7.48%
S&P 500
16.00%
Crude Oil
7.32%
Wilshire
12.70%
FI Credit
0.85%
S&P 500
12.00%
S&P 500
6.10%
S&P 500
-37.00%
REIT
26.27%
Crude Oil
15.10%
S&P 500
2.11%
Gold
6.96%
FI Credit
1.45%
FI Credit
1.12%
Wilshire
0.70%
Gold
8.60%
REIT
0.70%
Wilshire
-37.23%
Gold
23.96%
S&P 500
15.06%
FI Credit
1.75%
FI Credit
3.69%
REIT
1.26%
US Treasury
0.63%
US Treasury
0.56%
REIT
7.10%
FI Credit
0.70%
REIT
-39.05%
FI Credit
11.59%
FI Credit
4.15%
US Treasury
1.55%
US Treasury
0.43%
US Treasury
0.36%
Gold
-1.51%
Gold
-10.50%
FI Credit
2.38%
US Treasury
0.26%
Crude Oil
-53.52%
US Treasury
0.80%
US Treasury
2.40%
Wilshire
0.98%
Crude Oil
-7.08%
Gold
-28.26%
Crude Oil
-45.76%
Crude Oil
-30.50%
US Treasury
0.89%
Crude Oil
-6.00%

Core
principles
On February 3, 2017, President Trump signed the Presidential Executive Order on Core Principles for Regulating the United States Financial
System. The core principles listed in the order are:
  Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement and build
individual wealth
  Prevent taxpayer-funded bailouts
  Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk
and market failures, such as moral hazard and information asymmetry
  Enable American companies to be competitive with foreign firms in domestic and foreign markets
  Advance American interests in international financial regulatory negotiations and meetings
  Make regulation efficient, effective and appropriately tailored
  Restore public accountability within federal financial regulatory agencies, and rationalize the Federal financial regulatory framework
Review
process
  Empower The Secretary of the Treasury will review and consult with the heads of member agencies of the Financial Stability Oversight Council
(FSOC)
  The review will focus on the degree to which the existing laws and regulations promote the Core Principles and identify the ones that contradict
the Core Principles
  The review process is to be completed and submitted to the President within 120 days of the date of the executive order (February 3, 2017)
and repeated periodically thereafter
No
immediate
impact
  Executive orders do not have any immediate actual impact, nor do they alter the existing Dodd-Frank Act. Executive orders must first be
reviewed and require legislation to substantially change the law
  Currently, the future impact is unknown as no changes have been released
  While some aspects of regulations may be loosened, any changes would take time through the slow political and regulatory rulemaking
process. As a result, minimal impact is expected in 2017
  Many of the regulatory reforms have translated positively after years of enhancing infrastructures and increase barriers to entry
  Rumors include: the possible extension of CCAR stress testing to every two years rather than annually, not finalizing currently proposed rules,
and potentially loosening regulation limiting regulatory authority and diminishing fines issued
  The Fed’s recent adoption of a less-onerous CCAR process for banks under the $250 billion threshold suggests that higher standards
for G-SIBs remain
U.S. banks regulations: Trump’s executive order
Source: Whitehouse.gov, SVB Asset Management
20

Key
objectives
The Financial CHOICE Act (FCA) was introduced by Representative Jeb Hensarling in 2016, and may serve as the blueprint for financial reform.
Its key objectives are to:
1.  Provide for the election to be a strongly capitalized, well-managed financial institution
2.  End ‘too big to fail’ and bank bailouts
3.  Empower Americans to achieve financial independence by fundamentally reforming the Consumer Financial Protection Bureau (CFPB) and
protecting investors
4.  Demand accountability from financial regulators and devolve power away from Washington
5.  Demand accountability from Wall Street through enhanced penalties for fraud and deception
6.  Unleash opportunities for small businesses, innovators and job creators by facilitating capital formation
7.  Provide regulatory relief for Main Street and community financial institutions
Key
proposal
highlights
  Banks could exempt themselves from most federal prudential
financial regulations if they maintain a leverage ratio greater than or
equal to 10 percent
  Eliminate stress testing for all banks with less than $50 billion in
total assets or that qualify as a traditional banking organization
  Repeal Orderly Liquidity Authority and change to bankruptcy code
  Repeal restrictions on: the Volker Rule, the Durbin Amendment, and
the Department Of Labor Fiduciary Rule
  Modify existing regulatory agencies: remove FSOC, replace CFPB,
expand Securities and Exchange Commission (SEC) framework,
ensure congressional oversights of appropriations on financial
regulators, ensure congressional review of federal financial agency
rulemaking
  Conduct an annual study on ending Fannie Mae/Freddie Mac
conservatorship
  Implement Federal Reserve oversight reform and modernization:
changes to Federal Open Market Committee (FOMC) and
amendment to Federal Reserve powers
  Eliminate financial market utility designation
No
immediate
impact
  Regulatory change process is complex and will require significant
legal review.
  The impact of individual banks’ credit profiles will be determined by
the response to any implemented changes.
  As global financial institutions, GSIBs would remain subject to
international regulatory standard such as Basel III — so drastic
changes to local regulation may be offset.
  Banks will continue to require strong Nationally Recognized
Statistical Rating Organization (NRSRO) ratings. NRSROs are
likely to require banks to maintain strong financial metrics, including
those created as requirements following the financial crisis — so it
is in a bank’s best interest to ensure that these strong financial level
metrics are maintained.
U.S. banks financial regulation: Financial CHOICE Act proposal
Source: Congress.gov, SVB Asset Management.
21

U.S. banks performance: Healthy assets and solid capital
Loss provisions % net charge-offsNoncurrent loans & leases as % Tier 1 capital plus reserves
Total loans and leases growth
  Solid 2016 industry results indicate healthy asset quality and solid capital.
  Bank loan growth continues to be healthy with all major loan categories
reporting positive growth in 2016, particularly for community banks.
  Community banks, which accounted for 43 percent of the industry’s small
loans to businesses, grew at a faster pace — led by growth in commercial
real estate loans, commercial and industrial loans and residential
mortgages.
  Declining non-current loans and stable loan loss reserves led to
improvement in the industry’s ability to absorb credit losses.
  2016 marked the lowest percentage of unprofitable banks for any year
since 1995.
Source: FDIC. Data as of 12/31/16.
22
0%
50%
100%
150%
200%
250%
Percent
Assets > $250 billion Assets $10 billion - $250 billion
Assets $1 billion - $10 billion Assets $100 million - $1 billion
Assets < $100 million
0.00
0.10
0.20
0.30
0.40
0.50
Percent
Assets > $250 billion Assets $10 billion - $250 billion
Assets $1 billion - $10 billion Assets $100 million - $1 billion
Assets < $100 million
-40
-20
0
20
40
60
80
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Percent
Total loans and leases growth YoY
50
40
30
20
10
0
250
200
150
100
50
0

Credit cycle: Corporate credit health remains resilient
  Leverage remains near historic lows.
  Though operating margin has been on a decline since peaking in late 2014, it stabilized in 2016.
23
S&P 100S&P 500
Source: Bloomberg. Data as of 3/20/17.
20.0
25.0
30.0
35.0
40.0
45.0
7.0
9.0
11.0
13.0
15.0
17.0
Percent
Percent
Operating margin (LHS) Total debt to total asset (RHS)
20.0
25.0
30.0
35.0
40.0
45.0
7.0
9.0
11.0
13.0
15.0
Percent
Percent
Operating margin (LHS) Total debt to total asset (RHS)

Credit cycle: Corporate credit fundamentals hold steady
  Across all corporate sectors, credit metrics showed little change sequentially from the previous quarter — with energy showing meaningful improvement in
margin.
S&P 500 debt to assets by sector
S&P 500 operating margin by sector
Source: Bloomberg, operating margin trailing 12 months data.
24
0
10
20
30
40
50
Energy Materials Industrials Consumer
discretionary
Consumer staples Health care Financials Information
technology
Telecom services Utilities
December 2016 March 2017
-15
-5
5
15
25
Energy Materials Industrials Consumer
discretionary
Consumer staples Health care Financials Information
technology
Telecom services Utilities
December 2016 March 2017
Source: Bloomberg. Data as of 3/20/17.

Cut top rate
  Reduce top corporate tax rate from 35 percent to 20 percent
(or as low as 15 percent)
  Improve profit margins, encourage investments
Minimal impact on bond issuance
Immediate deduction of
capital spending
  Reduce cash tax cost of capital projects
  Encourage investments
Increase bond issuance in capital-intensive
industries
Eliminate interest
deduction
  Increase cost of borrowing
  Make equity (particularly preferred) financing relatively
more attractive
Reduce high-yield bond issuance for
non-financials
Foreign tax repatriation
  Special tax holiday (10 percent or 8.5 percent) on repatriation of
overseas cash
  No tax on future foreign income
Reduce investment-grade bond issuance in cash-
rich sectors (technology and pharmaceuticals)
Border adjustment
  No income tax on exports, tariff on imports
  Encourage domestic manufacturing, discourage imports
Minimal impact on bond issuance
Corporate tax reform: What proposals mean for bond issuance
Source: SVB Asset Management. https://waysandmeans.house.gov/taxreform/, https://assets.donaldjtrump.com/trump-tax-reform.pdf
25

United States: Policy divergence propelling the dollar
10 year yieldsDollar index
  The U.S. dollar (USD) retreated after the FOMC maintained their forecast of the dot plot in March with three projected rate hikes per year from 2017 to 2019.
While the tightening cycle should continue at a moderate pace, it was a little less aggressive than some had predicted. This transpired into long USD
liquidation with the dollar index shedding -2.5 percent from its highs in early March.
  Over the medium term, policy divergence and yield differential are still in favor of USD assets with the USD benefitting from capital inflows. Recent comments
from Janet Yellen and other Fed officials have been quite hawkish and they were successful in guiding expectations for further tightening in just a short period
of time.
  There is still a lot of uncertainty around Trump’s fiscal reforms, trade and immigration policies. But, so far the market has given the President the benefit of
doubt as equities stayed elevated near record highs despite the recent pull back. Of course, how much of Trump’s fiscal agenda is passed into legislation, the
timing for implementation and its impact on the market will be revealed in due course. With more clarity on the fiscal front and additional economic data, the
Federal Reserve will have more ammunition to reshape the rate path if necessary.
Sources: Bloomberg, Silicon Valley Bank, SVB Asset Management. Data as of 3/31/17
27
92
94
96
98
100
102
104
U.S.dollarindex(DXY)
0
0.5
1
1.5
2
2.5
10yearyields,%
U.S. Germany Japan U.K.

Great Britain: Economically sound, politically driven
FTSE 100 IndexBritish pound
  The U.K. referendum on June 23, 2016 sent GBPUSD down 15% in a day and the pound has stayed under pressure ever since with the uncertainty of the
Brexit negotiation looming.
  U.K. Prime Minister Theresa May invoked Article 50 on March 29 to officially commence an exit from the EU. While her government has outlined 12 high-level
priorities that include controlling U.K. law and immigration, free trade with European markets and establishing new unilateral trade agreements with other
countries — the government’s desire for an orderly Brexit over a two-year time horizon is quite ambitious. May cautioned that they are prepared to walk away
if the U.K. doesn’t get the right deal, and their European adversaries have equipped themselves with plan B if negotiations breaks down, which suggests we’ll
be in for a bumpy ride.
  Recent economic data from the U.K. has been robust as the weaker GBP injected fresh stimulus to trade and the economy, helping to propel the FTSE 100
up 26 percent since the referendum. However, the real game of brinksmanship begins when the Europeans come to the table to negotiate the divorce
settlement. The direction of the UK and European economies, as well as currency volatility, will be driven by politics. A hard Brexit outcome could see the
GBP and euro get punished and test new lows.
Sources: Bloomberg, Silicon Valley Bank, SVB Asset Management. Data as of 3/31/17.
28
5700
5900
6100
6300
6500
6700
6900
7100
7300
7500
FTSE100Index
1.2
1.25
1.3
1.35
1.4
1.45
1.5
1.55
GreatBritishpoundperU.S.dollar
(GBP/USD)

Europe: Elections loom large
French election pollsEuro currency
  Upcoming elections in France, Italy and Germany will be important.
France’s Marine Le Pen, a right-wing presidential candidate, warned that if
she wins, she will lead France out of the Eurozone. However, with her rival
Emmanuel Macron gaining meaningful ground at the polls, the risk of
‘Frexit’ has been reduced significantly. Together with more certainty from
the Fed, FX option volatilities generally have skidded lower, with three-
month EURUSD volumes (9 percent) near the November 2016 low —
despite the election risks ahead.
Sources: Bloomberg, Oddschecker, Silicon Valley Bank, SVB Asset Management. Data as of 3/31/17.
29
  The euro/dollar currency pair (EURUSD) continues to weaken, shedding
nearly 9 percent from its highs in May 2016. Even though the European
Central Bank (ECB) announced in December 2016 that it would pare
down its quantitative easing program from €80 billion to €60 billion
beginning in April, the ECB extended the bond buying program by an
additional nine months. As a result, there will be a significant amount of
monetary accommodation through December 2017. ECB President Mario
Draghi could remove the easing bias as economic conditions improve.
But, given the current rate path between the ECB and the Fed, EURUSD
could challenge the psychological parity level.
1.02
1.04
1.06
1.08
1.1
1.12
1.14
1.16
EuroperUSdollar(EUR/USD)
0
10
20
30
40
50
60
70
%Chanceofwining
Marine Le Pen Emmanuel Macron Francois Fillon

Portfolio strategy: Macro overview
Source: SVB Asset Management and Bloomberg. Data as of 3/31/17. Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio.
Economy
Rates
Duration
Sector
Stable data
  Q3 2016 GDP: +3.5 percent (two-year high), Q4 2016 GDP: +2.1 percent
  Unemployment Rate: +4.5 percent (at or below 5 percent since September 2015)
  Weekly jobless claims average (YoY): 257,000, below 300,000 since March 2015
  PCE rose above Fed’s 2 percent target for the first time in five years
Directionally
Higher
  The rate outlook is for yields to move directionally higher, largely based on solid
economic data and inflationary fiscal policies
  Our focus will be to balance more attractive current income from the short end of the
yield curve with anticipated interest rate volatility
Defensive
  Short and intermediate benchmarks: long duration vs. benchmark as coupon income
should offset price volatility
  Intermediate-plus benchmarks: stay neutral to benchmark
  Long benchmarks: shorter to manage price fluctuations and maximize reinvestment
opportunities
Overweight
spread product
  Favor corporate bond, commercial paper and asset-backed securities. Diversify by
security type, sector and issuer concentration
  As rates rise spread product will help protect bond prices due to higher
income accruals
31

Institutional fund flows Year-to-date as of 3/31/17
Money markets: prime +12 billion
Money markets: government -63 billion
Investment grade credit fund flows (Lipper) +56 billion
Portfolio strategy: Prime vs. government money market funds
Our ongoing discussion is whether prime money market funds make sense from an investment standpoint — taking into consideration yield advantage over
government funds, as well as the floating NAV and potential fees and gates.
  Both government and prime money market fund yields have increased since mid-December.
  The spread between prime and government funds is averaging 35 to 40 bps, which is up from the pre-reform spread of 10 to 15 bps. This is due to the lack of
demand for prime fund securities relative to the increased demand for government bonds.
  Although yields have risen for both money fund types, our recommendation is still to allocate operating cash holdings to government money market funds due
to the potential of NAV changes.
32
Example of prime fund NAV fluctuationsExamples of prime and government yields
Source: SVB Asset Management, Bloomberg, Crane, Lipper. Data as of 3/31/17. Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio.
Money market fund flows show investors shifting allocations
from government funds, with the majority of allocation going
to investment-grade corporate funds.
0
0.2
0.4
0.6
0.8
1
1.2
Government fund Prime fund
0.9998
0.9999
1
1.0001
1.0002
1.0003
1.0004
1.0005
NAV

0.50
0.38
0.25 0.13
0.00
-0.13
-0.25 -0.38
-0.50
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
Percent
-100 -75 -50 -25 Base case +25 +50 +75 +100
% in market value
Short duration
3 month T-bill
Short duration
3-6 month T-bill
Intermediate duration
6 month T-bill
Intermediate-plus
duration
9 month T-bill
Long duration
1 year Treasury
Benchmark
duration 0.25 0.375 0.50 0.75 1.0
Portfolio duration
target
Portfolio strategy: Duration and interest rate risk management
Source: SVB Asset Management and Bloomberg. Data as of 3/31/17.
Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio as individual portfolio durations will vary.
Duration (price sensitivity) analysis
  We exercise a disciplined benchmarking approach to manage portfolio duration
where we position duration in a +/- 30 percent band around the appropriate
benchmark.
  In a rising rate environment where a portfolio is more susceptible to unrealized
losses, we mitigate this risk by managing average duration relative to the
benchmark, and by limiting exposure to longer-dated investments. This allows
for greater reinvestment opportunity to take advantage of higher anticipated
rates.
*Sample portfolio with duration of 0.5 years
33
-30% Neutral +30% -30% Neutral +30% -30% Neutral +30% -30% Neutral +30% Neutral-30% +30%

Portfolio strategy: Credit risk management
Key criteria for
approved issuers
1.  Strong franchise value
2.  Diversified business lines
3.  Strong balance sheet
4.  Healthy cash flow generation
5.  Strong liquidity profile
6.  Robust capital to absorb
downturns
7.  Management with solid
track record
8.  Prudent financial policy
9.  Quality and timeliness of
the disclosure
10.  Strong collateral performance
and sponsor’s interest
alignment for asset backed
securities
  We are highly selective in our security selection process, and look to diversify by sector, sub-sector and
issuer concentration.
  Our dedicated credit research team performs a rigorous examination of every issuer, as well as ongoing
credit monitoring of all investments.
  The credit analysis incorporates a proprietary scoring system to analyze issuers, and also takes into account
trading factors such as market liquidity, market depth and headline risk.
34
S&P Moody's Fitch Rating description
AAA Aaa AAA Highest credit quality
AA+ Aa1 AA+
High credit qualityAA Aa2 AA
AA– Aa3 AA–
A+ A1 A+
Upper-medium gradeA A2 A
A– A3 A–
BBB+ Baa1 BBB+
Medium gradeBBB Baa2 BBB
BBB- Baa3 BBB-
Investment grade
Source: SVB Asset Management and Bloomberg. Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio.

Portfolio strategy: Relative value curve analysis
Front-end Treasury yield curve
Source: SVB Asset Management and Bloomberg. Data as of 3/31/2017. Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio.
Flat
Flat
35
Treasury CP ABS AA Ind A- Ind AA Fin A- Fin
90D 0.72 0.87 1.00 1.14 0.86 0.96 0.94
180D 0.88 1.05 1.08 1.25 1 1.11 1.12
270D 0.99 1.16 1.17 1.33 1.16 1.18 1.34
1Y 1.07 1.28 1.44 1.2 1.32 1.36
1.5Y 1.17 1.47 1.61 1.33 1.47 1.53
2Y 1.25 1.65 1.7 1.49 1.7 1.68
2.5Y 1.38 1.81 1.8 1.72 1.83 1.88
3Y 1.49 1.97 1.9 1.78 2.03 1.97
Commercial
paper
Asset-backed
securities
  In Q1, Treasury yields rose across the curve led by the
front end.
  3-9 month Treasury yields rose on average 20 basis
points from year-end levels.
  Commercial paper and ABS yields are primarily
unchanged since the end of 2016.
  During same period, all Treasury yields have risen
approximately 20 basis points.
  In a rising rate environment, spread product typically
outperforms due to spreads tightening.
Treasury
  Due to our rate outlook, we are focusing on front end
Treasuries and agencies.
0.50%
0.62%
0.80% 0.91%
1.03%
1.19% 1.30%
1.45%
0.72%
0.88%
0.99%
1.07%
1.17%
1.25%
1.38%
1.49%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
3 mo 6 mo 9 mo 1 yr 1.5 yr 2 yr 2.5 yr 3 yr
3/31/17
12/30/16

Our team
Portfolio Management Team
Eric Souza
esouza@svb.com
Paula Solanes
psolanes@svb.com
Renuka Kumar, CFA
rkumar@svb.com
Jose Sevilla
jsevilla@svb.com
Hiroshi Ikemoto
hikemoto@svb.com
Jason Graveley
jgraveley@svb.com
President, SVB Asset Management
Lauri Moss
lmoss@svb.com
Head of Investment Strategy
and Portfolio Management
Ninh Chung
nchung@svb.com
Head of Credit Research
Melina Hadiwono, CFA
mhadiwono@svb.com
Credit and Risk
Tim Lee, CFA
tlee@svb.com
Daeyoung Choi, CFA
dchoi@svb.com
Nilani Murthy
nmurthy@svb.com
Silicon Valley Bank Partners
Teresa Quizon
tquizon@svb.com
36
Guest Contributors
Peter Ng, Senior FX Trader
png@svb.com@svb.com
Minh Trang, Senior FX Trader
mtrang@svb.com@svb.com

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we
believe to be reliable but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax,
investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision.
Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
All material presented, unless specifically indicated otherwise, is under copyright to SVB Asset Management and its affiliates and is for informational purposes only. None of the material, nor its
content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without the prior express written permission of SVB Asset Management. All trademarks,
service marks and logos used in this material are trademarks or service marks or registered trademarks of SVB Financial Group or one of its affiliates or other entities.
©2017 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial
Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.
B_SAM-17-15329 Rev 05-08-17.
SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Investment products offered by SVB Asset Management:
Are not insured by the FDIC or
any other federal government
agency
Are not deposits of or guaranteed
by a bank
May lose value
37

SVB Q2 2017 Economic Report

More Related Content

What's hot

Similar to SVB Q2 2017 Economic Report

More from Silicon Valley Bank

SVB Q2 2017 Economic Report