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Ultra-Short Fixed Income

as of 12/31/17

Fund Commentary

The Federal Reserve (Fed) raised interest rates at its December meeting by 25 basis points (0.25%). In conjunction with balance sheet reductions, the interest rate increase marked continued progress in the Fed's path to monetary policy normalization. The Federal Open Market Committee (FOMC) also revised its projections for economic activity in 2018 and 2019. The growth estimate for 2018 was increased to 2.50% from 2.10% and the unemployment rate is projected to fall to 3.90% by the end of 2018. Fed Chair Yellen commented that FOMC members had revised their estimates based on changes in tax policy supporting modestly stronger economic growth.

Rates rose sharply across the Treasury curve as investors priced in the effects of the tax cut on the U.S. economy and monetary policy. Treasury yields for one-year, two-year, and three-year issues increased by 44, 40 and 35 basis points (0.44%, 0.40%, 0.35%) for the quarter ending December 31, 2017, respectively. Credit spreads continued to perform well in the quarter as the Investment Grade Index's option-adjusted spread (OAS) reached 89 basis points (0.89%). Strong global demand for Investment Grade bonds, continued strong economic growth, higher corporate profits and the tax reform passing in December all contributed to the strong performance.

The Fund returned 0.13% for the quarter, exceeding the 0.01% benchmark return. The Fund maintained its neutral duration during the fourth quarter and continued to reinvest at higher rates. While higher Treasury rates detracted from performance, a strong allocation to floating rates and positive credit markets contributed to performance.

Not FDIC insured | May lose value | No bank guarantee

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