Bond yields were volatile during the third quarter. The United States continued to show modest growth, with strong results in key sectors such as autos and housing, accompanied by low inflation. For much of the period, interest rates rose driven by fears that the U.S. Federal Reserve would soon begin tapering their bond purchases under quantitative easing. Despite the Feds stated desire for transparency surrounding monetary policy, investors struggled to understand plans for its asset purchase program and benchmark federal funds rate.
The Fed surprised investors at its September meeting, failing to announce a tapering in its bond purchase program and downgrading its forecast for economic growth in 2013-2014. In addition, the Feds forward guidance indicated an expectation for the federal funds rate to remain at very low levels for much longer than investors had been anticipating. The Feds weaker outlook and signaling of a continuation of extremely accommodative policies led to lower yields across the interest rate curve as the quarter closed.
The Core Bond Funds return of 0.83% for the quarter outperformed its benchmark. An overweight position in corporate bonds and an underweight to U.S. Treasuries made the largest contributions to performance. Our fundamental research added value through security selection as well, as corporate holdings in the Fund appreciated significantly more than those held in the Index. The Funds yield curve positioning relative to the benchmark during the quarter represented the largest detractor from relative performance.
If you are a long-term, income-oriented investor who is looking to diversify your investments by gaining broad exposure to the U.S. bond market while eliminating your exposure to non-investment grade debt then this Fund may be right for you. It offers a diversified portfolio of bond securities primarily invested in U.S. investment-grade debt.
- Invest primarily in domestic investment-grade debt obligations with an average maturity, under normal circumstances, between three and 15 years.
- Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.
- Emphasize securities and types of securities (such as Treasury, agency, asset-backed, mortgage-related and corporate securities) that we believe have the potential to provide a favorable return.