The third quarter brought a continuation of synchronized global growth and bouts of geopolitical tension. North Korea launched its first intercontinental ballistic missile, which was met with new economic sanctions from the U.S. administration. Despite geopolitical risks and a lack of progress regarding fiscal stimulus in the United States, financial markets showed signs of stability as global growth accelerated. However, Hurricanes Harvey, Irma and Maria left widespread damage and skewed some economic data late in the quarter. The Federal Reserve (Fed) kept interest rates unchanged, but announced the beginning of its balance sheet reduction. Short-term yields rose due to the strong economic data and some hawkish rhetoric from the Fed regarding a potential December rate hike. This market weakness created a buying opportunity in both mortgage-backed securities and longer-term investment-grade corporate bonds.
Following a supply glut of investment-grade corporate issues throughout the summer months, issuance moved even higher in September, with nearly $100 billion in debt coming to the market in the first two weeks of the month. The rising supply, in combination with the increase in bond yields brought about by renewed discussions of tax reform, contributed to a lack of price movement for corporate issues into quarter end.
The Fund returned 0.51% and outpaced the 0.34% return of its benchmark for the quarter. The Fund’s overweight in higher-yielding market segments, together with its short duration positioning and tactical overweights to mortgage-backed securities, aided performance. An allocation to the banking sector within the investment-grade corporate bond segment also boosted returns.
Not FDIC insured | May lose value | No bank guarantee
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