- Volatility across major asset classes declined markedly in August
- The Reserve Bank of Australia, Reserve Bank of New Zealand (RBNZ) and Bank of England cut interest rates to record lows. In the US, however, hawkish rhetoric from the Federal Reserve (Fed) prevailed.
- Government bond yields ended broadly higher with the exception of UK gilts. The US dollar (USD) appreciated versus most currencies and credit sectors outperformed.
Recent Rise in US LIBOR Being Driven by Technical Rather Than Fundamental Forces
Three-month US LIBOR and commercial paper: rates on the rise
LIBOR is a benchmark rate that many banks worldwide use to charge each other for short-term loans and it serves as the first step to calculating interest rates on various loans.
Financial commercial paper is unsecured, short-term debt issued by a corporation. 90-day refers to the maturity on the commercial paper. Standard and Poor’s (S&P), Moody’s Investors Service, or Fitch assign bond credit ratings which typically range from AAA/Aaa (highest) to C/D (lowest). Securities that are not rated by any of the three agencies are listed as “Not Rated”.
- Opportunistic strategies drove returns over the course of the month as the global government core exposure was flattish as a decrease in select global rates (aided most by Mexico and Australia) was offset by exposure to Dollar Bloc currencies such as Australian dollar, Canadian dollar, and Mexican peso which depreciated against the USD
- Allocations to high-yield, investment-grade, and securitized credit drove the majority of results in opportunistic space for the month of August as credit spreads continued to tighten
- Macro-driven duration strategies contributed. Our underweight positions in the front end of the US curve were beneficial as the Fed’s rhetoric became more hawkish towards the end of the month.
- Macro-driven currency strategies were negative, driven by our underweight to the New Zealand dollar (NZD). Despite the RBNZ’s rate cut, the New Zealand dollar (NZD) appreciated during August as dairy prices and constructive employment numbers supported the currency.
- Quantitative country relative-value strategies detracted. Our long Australia 10-year versus short UK 10-year was the primary detractor as the Bank of England’s announcement of quantitative easing (QE) over and above the market’s expectations caused spread widening in the pair.
|Fund Performance (%)|
|As of 8/31/16||MTD||YTD||1 Year||3 Year||5 Year||Since Inception
|Hartford World Bond Fund A||0.00||3.19||2.24||2.32||2.73||3.32|
|With 4.5% Max Sales Charge||--||--||-2.36||0.76||1.79||2.42|
|Morningstar Category: World Bond||--||7.99||6.98||2.51||1.46||--|
|Citigroup World Government Bond Index||--||10.36||9.83||2.22||0.24||--|
|Barclays US Aggregate Bond Index||--||5.86||5.97||4.37||3.24||--|
Expenses3 % (Class A) Net Op. Exp.: 1.05% Gross Op. Exp.: 1.08%
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of the investment will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For more current performance information to the most recent month-ended, click here.
Portfolio Positioning & Market Outlook
- Portfolio duration1 was increased to 2.14 years primarily through a decrease in active short positions, but we remain bearish on duration broadly as valuations on government bonds continue to look rich. Some central banks are acknowledging the limits of monetary policy and the emphasis is shifting towards fiscal stimulus. Our US dollar exposure remains high at 89% amidst expectation for continued dollar strength.
- While the probability of a Fed hike has increased, the longer-run rate-hike path is likely to be revised down. We have a flattening bias in US duration.
- The significant mismatch between accelerating central bank QE and limited bond supply makes it difficult to generate a meaningful bond sell-off in the absence of an inflation shock. We are overweight duration in Europe, Australia and New Zealand.
- The closing output gap and lack of near-term productivity growth in the US should allow the Fed to resume its hiking cycle. We are overweight the USD versus the euro, Hong Kong dollar and NZD.
Currency Exposure (%)
|Currency Exposure (%)|
|As of 8/31/16||Fund||Benchmark2|
|Hong Kong Dollar||-2.20||0.00|
|New Zealand Dollar||-3.63||0.00|
A Word About Risk
All investments are subject to risk, including the possible loss of principal. There is no guarantee the Fund will achieve its stated objective. The Fund’s share price may fluctuate due to market risk and/or security selections that may underperform the market or relevant benchmarks. Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened due to the historically low interest rate environment. Obligations of U.S. Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the U.S. Government. Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Mortgage- and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. Derivatives may be riskier or more volatile than other types of investments because they are generally more sensitive to changes in market or economic conditions; risks include currency, leverage, liquidity, index, pricing, and counterparty risk. Foreign investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions. These risks are generally greater for investments in emerging markets. The Fund may have high portfolio turnover, which could increase the Fund’s transaction costs and an investor’s tax liability. The Fund is non-diversified, so it may be more exposed to the risks associated with individual issuers than a diversified fund. Privately placed, restricted (Rule 144A) securities may be more difficult to sell and value than publicly traded securities, thus they may be potentially illiquid.
1 Duration is a measure of the sensitivity of an asset or portfolio’s price to nominal interest rate movement.
2 Benchmark is the Citigroup World Government Bond Index.
3 Expense ratios are as shown in the most recent prospectus. Net expenses reflect contractual expense reimbursements in instances when these reductions reduce the fund’s gross expenses. Contractual reimbursements remain in effect until February 28, 2017 and automatically renew for one-year terms unless terminated.
Citigroup World Government Bond Index is a market-capitalization weighted index consisting of government bond markets. Country eligibility is determined based on market capitalization and investability criteria. All issues have a remaining maturity of at least one year.
Barclays U.S. Aggregate Bond Index is composed of securities from the Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.
Indices are unmanaged and not available for direct investment.