Market Sector Update

• Markets were on a roller coaster ride in the quarter. Trade worries, tariffs, political turmoil, slowing global growth, Brexit and an inverted yield curve kept markets volatile.
• Yields rose in July, fell in August and then rose in September. The net effect of the volatility was lower yields at the end of the quarter than the beginning. The yield on the 2-year U.S. Treasury note fell 13 basis points (bps) to end the quarter at 1.62%. Similarly, the yield on the 5-year U.S. Treasury note dropped 22 bps to 1.55% to end the period.
• As anticipated, the Federal Reserve (Fed) cut the federal funds rate 25 bps at its July and September meetings. The range on the federal funds rate is now 1.75-2.00%.
• The yield curve, as measured by the difference in yields on the 10-year U.S. Treasury note and the 2-year U.S. Treasury note, inverted on Aug. 26. This segment of the yield curve remained inverted for one week and peaked at 5 bps. It attracted attention from the financial press and the market, as an inverted yield curve can be a precursor to a recession. Another measure of the yield curve, which the Fed appears to prefer, is the difference between the yields on the 10-year U.S. Treasury note and the 3-month U.S. Treasury bill. This measure of the yield curve inverted on May 23 and has remained inverted nearly every day since.
• The rally in U.S. Treasuries this year has sent yields lower. This has led to a large portion of the mortgage-backed securities universe being eligible to be refinanced at lower rates. Prepayment speeds have been increasing as mortgage holders take advantage of the opportunity. This has pushed spreads wider on mortgage-backed securities and pass-through securities, in particular.

Portfolio Strategy

• The Fund had a positive return for the quarter, but underperformed its benchmark.
• We increased the Fund’s duration during the quarter, which is now at benchmark duration. We sold U.S. Treasuries maturing in the next year and bought a combination of U.S. Treasuries maturing in 4, 10 and 30 years.

Outlook

• The U.S. economy is beginning to show some stress. The tariffs are starting to take a toll, while global weakness may be spreading to the U.S.
• Expectations are for at least one more rate cut this year at the Fed’s October or December meetings. We have already seen the yield curve invert and, should the economic data continue to weaken, we could see rate cuts at both meetings. We think the Fed will do everything in its power to keep the expansion going. With benign inflation, it seems to be free to continue stoking the economy with ever lower rates and a growing balance sheet.
• We believe a trade agreement with China would help increase confidence and improve the outlook for the U.S. economy, especially if it comes before any additional economic weakening.
• As spreads widen on mortgage-backed securities, we will be looking for opportunities to increase the spread in the Fund without taking on oversized risk.
• We will continue to watch incoming data and look for opportunities to increase our defensive positioning in the Fund. We believe the Fund is positioned to perform well given its strong allocation to U.S. Treasuries.

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 Sept. 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.