Market Sector Update

• The U.S. Treasury market remained volatile in the fourth quarter of 2019. Ongoing negotiations of the U.S.-China trade deal dominated the markets. Progress in negotiations led to a “risk on” environment, sending U.S. Treasury prices lower and yields higher, while stalled discussions had the reverse effect.
• The 2-year U.S. Treasury note ended the quarter at 1.57%, roughly 5 basis points (bps) lower than the beginning of the quarter. However, both the 3-year and 5-year U.S. Treasury notes saw yields end the quarter higher at 1.61% (5 bps higher) and 1.69% (15 bps higher), respectively.
• While the yield curve inverted in the third quarter, it steepened in the fourth quarter. The spread between the yields on the 2-year U.S. Treasury and the 10-year U.S. Treasury increased from 10 bps to start the quarter to 35 bps at the end of the period.
• The Federal Reserve’s (Fed) preferred method of measuring the yield curve is the difference between the yields on the 10-year U.S. Treasury note and 3-month U.S. Treasury bill. This part of the yield curve inverted in May and remained inverted nearly every day until October 11 when the Phase 1 trade agreement with China was announced, which sent longer yields higher. That same day, the Fed announced it would start buying $60 billion monthly in U.S. Treasury bills, which sent yields on shorter maturities lower. After that point, this measure of the yield curve was not inverted for the remainder of 2019 and ended the year at 37 bps.
• The Fed cut rates for the third time in 2019 at its October meeting. Chairman Jerome Powell stated the Fed anticipates remaining “on hold” throughout 2020. The current federal funds rate is in the range of 1.50% to 1.75%.

Portfolio Strategy

• The Fund had a slight negative return during the period and underperformed benchmark, which also had a slight negative return for the quarter.
• We reduced our positions in agency commercial mortgage-backed securities and agency collateralized mortgage obligations and added agency pass-through securities in the quarter.
• The securities sold had tightened significantly and had rolled down the maturity curve, meaning the positions were approaching maturity. We believe the new securities should enhance the portfolio’s return profile without adding excessive risk.

Outlook

• It is expected the Phase 1 trade deal with China will be signed Jan. 15. Subsequently, talks would move to Phase 2, and then the markets will assess the likelihood of future agreements. We anticipate market volatility to continue based on headlines and tweets around the negotiations.
• The Fed expects to be “on hold” for the remainder of 2020, with neither rate cuts nor rate hikes. It has communicated its willingness to let inflation exceed 2% for a time since it has been below 2% for so long. We believe the Fed will do all it can to keep the expansion going. Should the economic data weaken significantly, they will not hesitate to lower rates.
• We will continue to look for opportunities in the mortgage-backed securities space to enhance returns in the portfolio.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Dec. 31, 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

All information is based on Class I shares.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.