The U.S. Federal Reserve (Fed) chose not to raise interest rates when it met in September, but announced a plan to begin unwinding its balance sheet. The Fed maintained its expectations for one more hike in 2017 and three in 2018, even as it revised its median forecast for core inflation downward for both 2017 and 2018. The Fed’s median forecast for short-term rates remained at 1.375% for the end of 2017, and at 2.125% for the end of 2018, unchanged from its June meeting.
During the third quarter, investors reacted to a combination of accelerating economic growth and the prospect of tighter Fed policy. Short-term issues, which are more sensitive to expectations for short-term rate movements, lagged the market as a whole. The yield on the two-year note rose from 1.38% to 1.47%, while the yield on the five-year note climbed from 1.89% to 1.92%. The 10- and 30-year notes, each of which rose just two hundredths of a percentage point in yield, experienced the smallest increase. Together, these moves led to a flattening of the yield curve. Mortgage-backed securities outpaced Treasuries due in part to their higher yields.
The Fund returned 0.24% for the quarter, slightly underperforming the 0.29% return of its benchmark. The Fund’s tactical exposure to mortgage-backed securities was a positive contributor, while its yield curve and duration positioning detracted.
Not FDIC insured | May lose value | No bank guarantee
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