Issuers in the investment-grade corporate bond market took advantage of tight credit spreads and declining interest rates to issue a record amount of debt for the first half of the year. The flood of new corporate supply was well received by investors, who continue to search for yield in the low-rate environment. Issuance in other investment-grade asset classes such as U.S. Treasuries, U.S. government agencies, mortgage-backed securities and asset-backed securities disappointed investor expectations. The large inflow of money into investment-grade strategies coupled with these supply shortfalls helped to keep interest rates low and credit spreads tight.
The Funds return of 2.46% for the quarter outperformed the benchmark. The Funds sector allocation and security selection were the largest contributors to performance. In particular, the Fund was overweight corporate bonds and commercial mortgage-backed securities, while underweighting U.S. Treasuries. The Funds yield curve positioning represented a less significant positive contributor.
If you're a conservative, income-oriented investor who wants higher current income than that generally offered by the U.S. Government Fund and you're willing to assume moderately more risk in exchange, you may find this Fund suitable. This Fund can also be an appropriate choice for investors who want to broaden and diversify their fixed income portfolio.
- Invest primarily in investment-grade domestic debt obligations with an average maturity, under normal circumstances, between three and 15 years, but may own, to a limited extent, securities of foreign issuers and non-investment-grade debt.
- 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, mortgage-related and corporate securities) that we believe have the potential to provide a favorable return.