- Positive economic data, solid corporate earnings, and a rally in commodity prices supported fixed-income markets. Central bank developments around the globe and political uncertainty in the US also dominated the headlines.
- The Bank of Canada raised interest rates for the first time in seven years and made hawkish comments about upcoming rate hikes. The Federal Open Market Committee’s July statement indicated that the Federal Reserve (Fed) will start reducing its bond portfolio “relatively soon.”
- Most global-government yield curves steepened over the month. US Treasury yields were largely unchanged, while Australian and Canadian yields increased, supported by rising commodity prices. The Bank of Canada’s rate hike and hawkish outlook also drove some of the increase in Canadian yields.
- Most currencies appreciated versus the US dollar (USD) as political uncertainty continued to act as a drag on the greenback.
- Hartford World Bond Fund returns were positive over the course of the month as both global government core exposures and opportunistic sources of return added to returns.
- In global-government core exposure, the majority of returns were derived from core currency (FX). Our exposure to the Norwegian krone (NOK) benefitted the most as inflation was higher than expected, breaking the global trend for below-consensus inflation. In global-government core rates, performance was also positive as global rates were mixed, but positions in countries such as New Zealand, US, and Denmark were beneficial.
- Credit strategies were positive as spreads continued to tighten led by sectors with lower credit quality.
- Macro duration1 strategies detracted. Our flattening bias in the US was the primary detractor. Most global- sovereign yield curves steepened over the month as Fed-policy normalization and constructive economic data in Europe and China pushed intermediate and long-end yields higher.
- Macro-driven currency strategies detracted. Our overweight bias to the USD was the primary detractor as most currencies appreciated versus the dollar against a backdrop of US political uncertainty.
- Quantitative strategies were also negative. Our long Canada 10-year versus short Germany and US 10-year positions were the biggest detractors. Developed-market rates generally moved higher and Canada led the way again, with the largest increase in yields for the second consecutive month given the Bank of Canada’s rate hike.
Expenses2 % (Class A) Net Op. Exp.: 1.05% Gross Op. Exp.: 1.11%
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 duration increased modestly to 1.88 years at month end due to a decrease in active short positions. We continued to maintain a conservative duration posture, as valuations on government bonds look rich in spite of the recent selloff in rates. We have been decreasing our USD hedge ratio3, but the overall level remains high as a reversal in recent inflation softness and a pickup in wage pressures could trigger support for the USD.
- The Fed is tightening while US inflation is benign and political risk is rising. We have a flattening bias in US duration.
- We think there are excessive rate-hike expectations built into the Canadian rate curve, especially given Canadian consumers’ indebtedness and sensitivity to rising rates. We are overweight duration in Canada.
- A change in the European Central Bank’s (ECB’s) policy stance should also free up other central banks (specifically Sweden and Norway) that have been, in effect, shadowing the ECB. We are overweight the Swedish krona and the NOK versus the euro.
- The abatement of political risk in Europe and the strength of the European economy should support the performance of euro-denominated corporate credit. We are gradually adding to the portfolio’s European credit exposure with an emphasis on the banking sector.
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. If the Fund’s strategy for allocating assets among different asset classes and/or portfolio management teams does not work as intended, the Fund may not achieve its objective or may underperform other funds with similar investment strategies. 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 because interest rates are at, or near, historical lows. 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 and more volatile 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 (e.g., “Brexit”). These risks are generally greater for investments in emerging markets. 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. The Fund may have high portfolio turnover, which could increase the Fund’s transaction costs and an investor’s tax liability.
1 Duration is a measure of the sensitivity of an asset or portfolio’s price to nominal interest rate movement.
2 Expenses stated as of the fund’s 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 2/28/18 and automatically renew for one-year terms unless terminated. Certain contractual reimbursements for Class R6 and Class F shares remain in effect until 2/28/18.
3 Hedge ratio compares the value of a position protected through the use of a hedge (an investment to reduce the risk of adverse price movements in an asset) with the size of the entire position itself.
4 Benchmark is the Citigroup World Government Bond Index.
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.
Bloomberg Barclays U.S. Aggregate Bond Index is composed of securities from the Bloomberg 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.