1st Quarter 2014
The Fund outperformed its Barclays US Aggregate Bond Index benchmark during the quarter, driven by the portfolio’s overweight to Corporate bonds. Credit securities outperformed duration-matched US Treasuries as spreads tightened slightly. Long-maturity credits outperformed intermediates on both an absolute and a duration-adjusted basis. Lower-quality investment-grade securities outperformed on a duration-adjusted basis as quality curves flattened. BBB-rated securities moderately outperformed A- and AA-rated securities, and to a more significant degree AAA-rated bonds. Noteworthy, was that by the end of the quarter credit securities had increased to its highest percentage (29.1%) in the benchmark since September 1979.
US Treasuries posted positive returns during the quarter as rates on 10-year Treasuries fell from 3.03% at year-end to 2.72% by the end of the first quarter. Intermediate-term Treasuries posted positive returns but lagged longer term Treasuries, which rose sharply, by a significant margin as the yield curve flattened with 30-year bond yields falling from 3.96% at year-end to 3.56%. Mortgage-backed securities (MBS) slightly underperformed duration-matched Treasuries with the option-adjusted spread (OAS) for U.S. agency MBS widening. The two Fed announcements regarding tapering (the reduction of monthly purchases of fixed income securities) during the quarter cut purchases of MBS from $35bn to $30bn and then to $25bn each month.
After an initial weakening of economic data early in the quarter, partially attributable to the harsh winter season, many key economic statistics including employment, housing, and Gross Domestic Product (GDP) began to improve. Unemployment remained stable at 6.7%, but is expected to continue to fall now that winter is behind us. Underemployment, a metric getting increased attention from the Federal Reserve, fell from 13.1% at year-end to 12.6%. Together these measures, along with an increased workforce participation rate of 0.2%, indicated a strengthening labor market during the quarter.
Despite the initiation of the Fed’s ‘tapering’ program first announced in December, interest rates declined during the quarter. Geopolitical concerns in Emerging Markets, especially the Russian/Ukrainian standoff over Crimea, and fears of slowing global economic growth contributed to the decline in rates. The Fed announced that it would continue its tapering program, eventually reducing monthly purchases from $75 billion to $65 billion and then to $55 billion in March. Although that glide path was expected, the suggested time-frame for short-term rate hikes appeared to shorten based on new Fed Chair Janet Yellen’s comments and projections from the Fed Open Market Committee. The market initially reacted negatively to that information, with rates rising somewhat in March, though not nearly back to 2013 year-end levels. By the end of March, the Fed appeared to hedge its earlier comments, with Chair Yellen restating the Fed’s ‘extraordinary commitment’ to help the economy via monetary policy and keep interest rates low for a prolonged period.
Neither the flow of economic data nor recent Fed statements have changed our views. We do not currently consider the Ukraine situation as likely to cause a broader disruption to international markets. As such, we are maintaining the portfolio’s yield curve positioning with longer duration securities combined with high-quality floating rate securities, as we do not anticipate a substantial increase in yields in the near term.
Taplin, Canida & Habacht (TCH)
Note: Bond funds are subject to interest rate and credit risk similar to individual bonds. As interest rates rise or credit quality suffers, an investor is susceptible to loss of principal.
Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.