1st Quarter 2012
In its March 13, 2012 directive, the Federal Reserve indicated that information received since its January 15 meeting suggests the U.S. economy had expanded moderately. It cited a notable decline in the unemployment rate and a continued increase in business fixed investment as leading to moderate growth in the coming quarters. Despite these positive improvements, the Fed affirmed its stance towards a highly accommodative monetary policy, and once again commented that low utilization rates and a subdued outlook for inflation over the medium run warranted exceptionally low interest-rate levels through late 2014. The Fed also noted that the recent increase in oil and gasoline prices would likely push up inflation temporarily, but that it anticipated that price increases would remain within its target limits.
The Fund outgained its Barclay’s Capital US Aggregate Bond Index benchmark by a sizeable margin during the quarter. Outperformance was driven by an overweight stake to Corporates, which was the best performing sector of the fixed-income market on both an absolute and a duration-adjusted basis during the first quarter as spreads tightened. The portfolio was also overweight better performing lower-quality, investment-grade securities. During the first three months of 2012, BBB-rated securities outperformed AAA-, AA-, and A-rated securities—and by a wide margin in the case of AAA bonds.
The favorable returns were offset somewhat by our bar-bell portfolio strategy as the yield curve shifted in a bear-steepening fashion during the quarter. In this environment, longer-dated securities underperformed. Intermediate Treasuries outperformed long Treasuries by more than five percentage points as the yield on the 30-year US Treasury Bond increased in reaching its highest level since September 2011.
The persistently low rates of nominal Treasury yields continue to hold real Treasury rates (nominal rates adjusted for inflation) negative beyond 10 years in maturity. In our view, short-term Treasury securities carry a large inflation risk with little margin for error. Accordingly, we think it is prudent to utilize instruments such as Treasury Inflation Protected Securities (TIPS), Corporate bonds and Floating-rate notes, all of which offer defensive characteristics against rising inflation, interest-rates, or both.
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.