Market Sector Update

• Yields across the U.S. Treasury curve fell substantially during the quarter. The yield on the 2-year U.S. Treasury note fell 50 basis points (bps) to 1.76%, while the 5-year U.S. Treasury note fell 46 bps to 1.77% at the end of the quarter. The front end of the yield curve is particularly flat and slightly inverted as the 3-year note ended the quarter at 1.71%.
• The first half of the year saw the Federal Reserve (Fed) shift its strategy from rate hikes to “patience” in the first quarter, then Chairman Jerome Powell pivoted toward rate cuts at the June Federal Open Market Committee (FOMC) meeting. Uncertainty about the trade environment and tariffs and global growth were key concerns. President Donald Trump raised the tariff rate from 10% to 25% on $200 billion imports from China in early May.

Portfolio Strategy

• The Fund had a positive return and performed in line with its benchmark for the quarter.
• We shortened the Fund’s duration in the first quarter as we believed rates were poised to rise. The Fund’s positioning remains in place, but rates have fallen. We will look to opportunistically move closer to the benchmark’s duration in the third quarter.

Outlook

• The current economic expansion is now the longest on record. It is clear the Fed wishes to keep promoting this expansion. Inflation is in check – the Consumer Price Index, Producer Price Index and Personal Consumption Expenditure Deflator all remain under 2%. The lack of inflation provides the Fed the room to cut rates should it be deemed necessary.
• Expectations are rising for a rate cut of at least 25 bps at the July FOMC meeting. The influx of data ahead of the meeting could shift expectations. May’s employment report was weak with nonfarm payroll number posting a gain of just 75,000 jobs. However, there will be another employment report and the first reading on second-quarter gross domestic product before the next Fed meeting.
• We believe fixed income should perform well for the foreseeable future. The Fed rate hikes are behind us and the potential for cuts lies ahead, both of which should support performance. In dealing with slower growth in Europe, the European Central Bank said it will do “whatever it takes” to help deliver positive growth to the economies of Europe. While domestic interest rates are low, they are negative far out on the yield curve in Europe. For example, the 10-year German bund yielded -33 bps at the end of June.
• Many market participants are debating the Fed’s reason for cutting rates. Some believe it is insurance cut aimed at helping to extend the expansion, while others think the cut is due to an impending economic recession. While we know expansions do not last forever, our view is that a recession is unlikely in the near term.

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 June 30, 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.