Market Sector Update

• An improving economic outlook caused yields to rise across the maturity curve in the first quarter. While the 2-year U.S. Treasury note increased just under four basis points (bps) to yield 16 bps, the 10-year and 30-year maturities saw their yields move dramatically by 83 and 77 basis points to yield 1.74% and 2.41%, respectively. The yield curve steepened from 79 bps at year end to 158 bps at the end of March.
• The third round of stimulus combined with a successful vaccine rollout has increased both optimism and the prospects of a return to normalcy sooner rather than later. Employment rose 1.6 million in the quarter. While unemployment remains higher than pre-pandemic, the reopening of our communities has helped to recover about 62% of the jobs lost in the pandemic. Near the end of the quarter, the Biden administration announced an infrastructure wish-list to help build and repair highways, bridges, airports, water systems, electric grids and increase broadband access across the country. These are some factors leading to the greatly improved economic outlook and expectations for growth in 2021 after an unprecedented drop of -2.4% gross domestic product growth in 2020.
• The Federal Reserve (Fed) was dovish at its March meeting and does not expect to taper its purchases of securities or to hike soon. The rise in yields was not a great concern as the prospects of growth naturally lead to a rise in yields. While it is anticipated that inflation will be elevated this year, Fed Chairman Jerome Powell expects it to be temporary. He noted the Fed wants to see inflation overshoot the 2% target for an extended period before taking action.
• The spreads of agency mortgage bonds continued to tighten in the quarter across the residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and collateralized mortgage obligations (CMO) asset classes. Prepayment speeds continued to increase during the period, despite the large move in rates in the long end of the curve.

Portfolio Strategy

• The dramatic rise in yields and the steepening of the yield curve presented an attractive opportunity to increase the Fund’s duration and the allocation to longer maturities.
• We added approximately 3% in longer duration U.S. Treasuries, raising duration relative to the benchmark from 91% to 101%.
• We believe prepayment risk in mortgages will decrease soon because of the recent 40 bps rise in mortgage rates. We continue to favor agency CMBS bonds and short-duration agency CMOs with strong current yield and prepayment protections.

Outlook

• Rising yields can be unsettling to bond markets because they can lead to losses. We believe these rate moves present opportunities to add yield to the Fund at a time when it is relatively cheap. We don’t think rates will go materially higher and remain there.
• We believe the Fed has plenty of tools to use if it feels the need to calm the markets. While we don’t know what level would cause Fed action, we feel it will act to lower yields should it be necessary. The Fed has said it will be keeping rates low for a long time. We believe the portfolio is now better positioned to participate in the carry trade in the market.

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 March 31, 2021, 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.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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.