The Federal Reserve, treasury, and governments around the world were busy this past quarter addressing the financial crisis and fears of a systemic collapse. By the end of March, investment markets seemed to be moving to a slightly more upbeat tone.
The overall economy continued to deteriorate, but the pace of decline began to moderate. While unemployment numbers worsened, new and existing home sales started to show some promise. U.S. government efforts to spark a housing-market recovery pushed mortgage rates to record lows and helped induce a wave of refinancing.
Interest rates moved higher for the first half of the first quarter and then trended sideways for the second half. The treasury yield curve steepened as the longer end of the yield curve saw the biggest rise in yields. Surprisingly the corporate sector generated negative excess and nominal return for the quarter, entirely explained by the disappointing performance of the financial sector.
The Bond Fund’s return for the first quarter exceeded the Barclays Capital U.S. Aggregate Index. With interest rates rising, the portfolio’s modestly longer duration relative to its benchmark hindered performance. The portfolio’s overweight in higher yielding mortgage-backed securities and underweight in Treasuries helped performance. For the coming quarter we expect spread product (i.e., corporates, mortgage-backed securities, etc.) to outperform treasuries. We will start to look for opportunities in BBB corporate bonds.
The government’s assortment of policy initiatives are gradually helping the economy regain its footing. We believe low mortgage rates should continue to benefit the housing market and contribute to the recovery.
| 
