- Hawkish statements from major central banks led to a sell-off in government bonds while credit markets continued to benefit from solid economic data
- In the US, the Federal Reserve (Fed) hiked policy rates and laid out a plan for balance sheet normalization later this year. Central Banks in Europe, England, and Canada all hinted at policy tightening, with the Bank of Japan being a notable exception.
- Most global sovereign yields increased over the month in line with the hawkish tone of major central banks. The US dollar (USD) declined versus most currencies. European currencies and the Canadian dollar were the primary gainers as central bankers hinted at normalizing policy given the broadening economic recoveries in their countries.
- Hartford World Bond Fund returns were positive over the course of the month as opportunistic strategies contributed positive performance and global government core exposures detracted
- Core currency (FX) added to performance, however, as our exposure to euro area currencies such as the Swedish Krona (SEK), Swiss franc, and Norwegian Krone contributed as the European cycle continues to improve
- Macro duration1 strategies contributed. Our tactical underweight positions in US Treasury Inflation-Protected Securities (TIPS) versus an overweight to nominal US Treasuries contributed to returns. Persistently weak US Consumer Price Index (CPI) data and political uncertainty led to a reduction in inflation expectations within the US.
- Macro currency strategies also contributed. An overweight to the SEK versus the euro was the primary contributor during the month. The SEK outperformed the euro during the European currency rally that occurred after the hawkish European Central Bank (ECB) rhetoric.
- Our credit strategies, particularly in high yield and securitized sectors, contributed to performance as spreads continued to tighten in May
- In global government core exposure, our core government bond holdings detracted from performance as interest rates increased in most developed markets amidst hawkish and coordinated central bank rhetoric
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 decreased modestly to 1.69 years at month end due to an increase in active short interest rate 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 ratio, 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.
- Major central banks will retain a policy normalization bias. We are underweight duration across major markets.
- The Fed is tightening policy; however there is a constrained political ability to accomplish the pro-growth agenda. We have a flattening duration bias in the US.
- A change in ECB’s policy stance should also free up other central banks (Sweden, Switzerland) that have been effectively shadowing the ECB. We are overweight the SEK versus the euro.
- The abatement of political risk in Europe and the strength of the European economy will support the performance of euro-denominated corporate credit. We have added 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 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.