Matt Tucker

The Great Duration Rotation Continues – But For How Long? (Tucker)


Monday, April 22nd, 2013

by Matt Tucker, iShares

In an earlier post I examined the mysterious rise in interest rates that we have seen in the first quarter the past few years.  Each year we’ve seen rates creep higher from January to March, and each year rates have ended December lower than where they started out earlier in the year.  While we have no way of knowing if this will be the case again in 2013, ETF flows in Q1 definitely illustrated investors’ concerns that the slight rate rise we were experiencing was a taste of things to come.  In particular, we saw large shifts within the fixed income ETF category as investors moved out of funds with more exposure to interest rates and into funds with less exposure.  Here were the three most notable examples:

  • Investment grade corporate bonds. We saw money come out of more rate sensitive funds like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), which lost $1.4bn.  This is a big number, but LQD was still able to maintain its status as the world largest fixed income ETF with assets of $23.6bn.  On the flipside, we saw flows into shorter funds like the iShares Floating Rate Note Fund (FLOT) which took in $483mn and the iShares Barclays 1-3 Year Credit Bond Fund (CSJ) which saw inflows of $874mn.  Notice that the flows out of LQD are almost the same size as the flows into FLOT and CSJ.
  • High yield bonds. A similar trend was observed in the high yield market.  Flagship high yield funds such as the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) lost money, with $595mn coming out in Q1.  Conversely, money flowed into perceived less interest rate sensitive high yield segments like short-term bonds and leveraged loans.
  • Emerging market bonds. Perhaps the most interesting of the examples was in emerging markets.  The iShares J.P. Morgan USD Emerging Markets Bond Fund (EMB) saw $963mn of outflows, but in this case there are no short maturity EM bond funds in the market.  Instead, we saw money go into local EM debt funds such as the iShares EM Local Currency Bond Fund (LEMB), which took in $222mn during the quarter.  Since the bonds in these funds are denominated in the local currency of the emerging market issuer, they would not be directly impacted by a rise in US interest rates.  This makes them an interesting defensive replacement for investors who are concerned about rising domestic interest rates but who are more constructive on local emerging market rates.

Notice that despite the rotation away from more rate sensitive investments, investors still showed a preference for yield and income.  This is one of the interesting results of quantitative easing. Interest rates are low, and investors are concerned that they will rise, but people still have yield and income targets that they want to hit.  For some investors this means that they have exchanged interest rate risk for credit and currency risk.

The great thing about all of the above flow data is that it is widely available in the market and updated on a daily basis.  Because of this, fixed income ETF flows are increasingly being recognized as one of the best indicators of investor sentiment.

What will Q2 bring?  With interest rates moving back down I expect that the shift into less interest rate sensitive funds will abate a bit, but the question is what will replace it.  My guess is that investors will continue to stretch for yield, and that the flow pattern we observed in the second half of 2012 will resume: investors moving into higher yielding segments of fixed income across sectors.  The piece I am not so sure about is whether investors will become comfortable that interest rates are not going to rise in the immediate future, and decide to move back into more interest rate sensitive funds. We shall see.

Source: BlackRock

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog.  You can find more of his posts here.

Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies.

 

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A Brief History of Bond ETFs


Thursday, July 19th, 2012

 

by Matt Tucker, iShares

With the volume of headlinesthat bond ETFs capture these days, it’s easy to take for granted the fact that these innovative products haven’t been around that long.  In fact, it was ten years ago this month that iShares launched the first bond ETF (the iBoxx Investment Grade Corporate Bond ETF – LQD), along with three others.

At the time, there was certainly a business case for developing a new way to access fixed income. The over-the-counter (OTC) market – where traditional fixed income instruments trade – can be opaque, hard to navigate, and prone to unnecessarily high expenses (I’ve talked about this at length here on the blog).  Putting bonds into an ETF vehicle would give investors the best of both worlds: targeted bond exposure with exchange liquidity and transparency.

Although the idea clearly had merit, there were still some questions about how it would all work.  Was it possible to put the OTC fixed income market on the exchange?  How would liquidity be created for these products?  What would a hybrid bond-equity product look like?  Bonds had been listed on the NYSE and other exchanges for years, but had never garnered much interest from traders or investors.  Would an ETF suffer the same fate?

Over 500 funds and $290 billion in assets later, the global fixed income ETF market’s success speaks for itself.  So what were some of the key developments that brought us from those first four funds launched in 2002 to the plethora of bond ETFs available today?  As I see it, there were three main stages that accounted for the market’s exponential growth:

  1. Creating a new market (2002-2006). In the first few years of fixed income ETFs, there were still only a handful of funds available, with slow and steady growth and usage by investors.  Since the building and launching of these funds required a re-thinking of the ETF structure itself, only one other provider outside of iShares was willing to take the bet.  By the end of 2006, there were still only six fixed income ETFs available with about $20 billion in assets.  However, we knew it was only a matter of time before the concept would catch on.
  2. Additional providers enter the market (2007-2008). By 2007, there was a growing understanding that the “experiment” had in fact worked.  The steady growth and acceptance of the fixed income iShares line-up had proven that there was investor appetite for buying bonds on an exchange.  More importantly, investors were hungry for more.  When the SEC standardized the fund structure and listing process for FI ETFs, a flood of new funds entered the market.  By the end of 2008, the size of the market had almost tripled to $56 billion in assets, spread across 61 FI ETFs from eight providers.
  3. The hunt for liquidity accelerates usage (2009-2012). During the financial market implosion at the end of 2008, trading volume in markets like corporate bonds fell by as much as 50%.  Why?  Liquidity in the bond market is supplied by broker/dealers, and since many of these firms were struggling to stay afloat, they pulled back from making markets in bonds.  Because of this, many investors discovered an alternative way to access bonds – through fixed income ETFs.  FI ETF trading volumes spiked, increasing 800 to 1000% for some funds.  And with increased volumes came increased asset flows and even broader investor usage.

Where does the fixed income ETF industry go from here?  We believe the market should continue to grow for several reasons.  First, changing demographics in the US and abroad are going to result in more and more investors seeking income-producing investments, and since ETFs provide an efficient way to access fixed income, they should benefit significantly.  Second, as global bond markets continue to evolve, increasing the investment opportunity set for investors, vehicles like ETFs that allow them to access challenging markets are likely going to be a vehicle of choice.  And finally, ETFs are still being discovered by many investors.  Despite all the growth of the past ten years, the ETF market is still tiny compared to the individual bond and mutual fund markets.

Given that ETFs are not just another way to buy fixed income, but are transforming the fixed income markets themselves, the sky is the limit for these game changing products.

Matt Tucker, CFA is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog.  You can find more of his posts here.


Bonds and bond funds will decrease in value as interest rates rise.

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Solving the Global High Yield Puzzle (Video)


Wednesday, July 18th, 2012

In the hunt for income, high yield bonds continue to be of interest to investors willing to take on the extra risk.  However, there are more ways to play this asset class than simply US high yield bonds.  In this short video, Matt Tucker explores the pieces that make up the high yield puzzle and how they might fit in a portfolio.

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Is High Yield Right For You?


Saturday, July 14th, 2012

 

by Matt Tucker, iShares

There’s been much ado about high yield bond ETFs in the media for a while now. And with good reason – after a six month stint as the asset class of choice for yield-hungry investors, these funds have been riding a roller coaster of late, making headlines for everything from large redemptions to record trading volume. With the story changing almost weekly, I think it’s a good idea to step back and ask a more fundamental question: what role does high yield play in an investor portfolio?

It’s an interesting question, particularly because with the introduction of high yield ETFs investors now have a new way of accessing the market. High yield ETFs have brought liquidity, transparency, and access to a market that was previously opaque and difficult to access for many investors, and today have grown to thirteen funds and $26 billion in assets globally. Choice is a good thing, but as always investors should consider their own portfolio needs before investing in any asset class or sector.

So what are the considerations for investing in high yield bonds? The obvious attraction is yield, particularly for income seeking investors battling with a prolonged low interest rate environment. The iShares iBoxx $ High Yield Corporate Bond Fund (ticker: HYG) has a 30-Day SEC yield of 6.65% (as of 7/9/12) However, it’s important to note that this yield comes at a price – namely, higher credit risk than most fixed income securities, and therefore a higher risk of default. It’s this perilous reputation that earned them the moniker “junk” bonds.

Despite the negative connotations, it’s important to remember that junk bonds are still bonds, and that means that they are generally less risky than equities (see below). This simple point is often misunderstood by many investors. High yield debt issuance has a higher claim on assets than equity issuance, which means that if a firm faces bankruptcy, the bond holders get paid before the equity investors. We’ve actually seen clients shifting their dividend-paying equity allocations into high yield for just this reason, as a way to reduce risk and boost income.

Of course, more risk also equates to higher expected returns. What’s interesting to me is how these different asset classes deliver return to investors. When an investor moves from Treasury bonds to investment grade corporates, they are taking on an increasingly high level of default risk and are being compensated with higher expected yields. When an investor goes from high yield to developed market equities they actually receive a lower expected yield but a higher expected price appreciation, which results in a higher expected return.

What’s the bottom line for how investors should think about high yield? As an asset class that offers some of the largest yields in fixed income markets high yield can play a role in generating income for a portfolio, but investors should be mindful of the increased risk relative to many other fixed income sectors. High yield’s best role is as a source of income in a broadly diversified portfolio.

Source: Bloomberg

Matt Tucker, CFA is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog. You can find more of his posts here.


Bonds and bond funds will decrease in value as interest rates rise. High yield securities may be more volatile, be subject to greater levels of credit or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity.
For HYG standardized performance, please click here

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Bond ETF Idea: Deconstructing the Agg


Friday, June 8th, 2012

 

by Matt Tucker, iShares

Its building block time again! I recently wrote a post about different ways that ETFs can help investors meet their income objectives. The two options were: 1) “No assembly required,” through a pre-packaged ETF of ETFs such as IYLD (the iShares Morningstar Multi-Asset Income Index Fund), and 2) “DIY,” using individual ETFs as building blocks to construct a customized portfolio. My main point was that a pre-packaged solution can be a great option for investors who don’t have the time, expertise, or inclination to create and continuously manage a portfolio on their own.

For investors who don’t have those challenges, a DIY approach to managing a fixed income portfolio may be the way to go. Each of our fixed income iShares ETFs is essentially its own building block, and they can be combined in a variety of ways to create a wide range of fixed income portfolios.

Why take this approach? For one thing, within the “fixed income” category, there are a variety of sectors that have very different risk and return characteristics. And since fixed income investors can have very distinct goals, meeting portfolio objectives typically requires more than a one-size-fits-all approach. For example, a portfolio that’s designed to generate income should look very different from one that has a goal of delivering alpha.

One strategy we are always talking about with clients is taking a broad benchmark like the Barclays US Aggregate Bond Index (“the Agg”), buying ETFs that represent its various sectors, then tilting exposures based on market factors, sentiment, and/or research calls. It’s kind of like constructing the toy vehicle shown on the building block box, and then giving it your own custom modifications.

The reason investors typically start with the Agg is because it’s generally considered to be a good representation of the broad US fixed income market. It combines six unique fixed income sectors – Treasuries, Agencies, Credit, Mortgage Backed Securities (MBS), Commercial Mortgage Backed Securities (CMBS) and Asset Backed Securities (ABS). As you can see below, each sector has a unique risk and return profile:

Components of the Aggregate – Relationship Between Yield, Duration & Credit Risk

Fixed income ETFs are a great tool for implementing this kind of strategy because, in addition to typically being low cost and tax efficient, there’s such a breadth and depth of products available today. For example, an investor might start with a strategic allocation that mimics the breakdown of the Agg (which is updated on a regular basis here), using ETFs to represent each sector. Then, they can customize based on their specific objectives. If income is the goal, they might lighten up on the lower yielding sectors in order to overweight those that are yielding more. In fact, investors can use our free Fixed Income Portfolio Builder tool (demo here) to explore fixed income portfolios that have the same duration characteristics as the Agg, but with the potential for higher yield. Investors can also make adjustments based on how much credit or duration risk they’re willing to take, or make tactical plays based on the current market environment. The idea is that the fine-tuning is in the investor’s hands.

You have all the blocks, what do you want to build?

Matt Tucker, CFA is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog. You can find more of his posts here.

Source: BlackRock, as of March 2012. Tickers shown in the table are related iShares ETFs that correspond to each index. Indexes used are: iBoxx $ Liquid High Yield Index (HYG), JPMorgan EMBI Global Core Index (EMB), iBoxx $ Liquid Investment Grade Index (LQD), S&P Nat’l AMT-Free Muni Bond Index (MUB), Barclays Capital U.S. Aggregate Bond Index (AGG), Barclays Capital U.S. 1-3 Year Credit Bond Index (CSJ), Barclays Capital U.S. 3-7 Year Treasury Bond Index (IEI), S&P Short Term Nat’l AMT-Free Muni Bond Index (SUB), Barclays Capital U.S. 1-3 Year Treasury Bond Index (SHY), BofA Merrill Lynch 10+ Year US Corporate & Yankees Index (CLY), Barclays Capital Emerging Markets Broad Local Currency Bond Index (LEMB), Barclays Capital U.S. Corporate Aaa – A Capped Index (QLTA). Yield represents the average YTM; Duration represents the effective duration

Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. For actual iShares Fund performance, please visit www.iShares.com or request a prospectus by calling 1-800-iShares (1-800-474-2737).

Bonds and bond funds will decrease in value as interest rates rise.
Transactions in shares of the iShares Funds will result in brokerage commissions and will generate tax consequences. iShares Funds are obliged to distribute portfolio gains to shareholders.

 

Copyright © iShares

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Redemption & Reality in High Yield ETFs


Friday, May 25th, 2012

 

by Matt Tucker, iShares

The high yield bond market is back in the news again.  On the back of increased concerns over the events in Europe there’s been an increase in high yield market volatility over the past few weeks.  Investors have seen this in the price movements of HYG (the iShares iBoxx High Yield Bond ETF). Of particular focus has been a series of redemptions out of HYG and other high yield ETFs.  These trades have been at times misunderstood by market participants, so I’m going to try to provide some clarity.

First off, it’s important to remember that HYG, just like all other iShares ETFs, has a process by which shares can be created and redeemed in large quantities on a daily basis (see a great video explaining this concept here).   So if investors are leaving the high yield bond market and selling shares of HYG, this may result in shares of HYG being redeemed and the shares outstanding declining.  This is a classic example of the ETF creation/redemption process in play.

But what’s interesting about the recent activity is that in addition to investors exiting the high yield market, some of the redemption activity we have seen in high yield ETFs is from investors who actually want to own high yield bonds.  Confusing?  I’ll explain.

Let’s say that you are a large investor and you want to build a high yield bond portfolio.  You know that transaction costs in the high yield market can be very high and that, due to the nature of the over-the-counter bond market, it could take days or even weeks to build a diversified portfolio.  With the growth of high yield ETFs, you now have a faster, cheaper way of building a bond portfolio – by buying shares of the ETF on the exchange, and then redeeming those shares in exchange for bonds from the ETF.

This is what happened with some of the redemptions we recently saw in the market.  Large investors wanted to own a diversified portfolio of high yield bonds, so they bought up shares of a high yield ETF on the exchange, and then redeemed the shares of the ETF for the underlying bonds. This is exactly what HYG and our other high yield iShares ETFs are designed to do – provide a liquid alternative to the over-the-counter bond market.

The key to such a trade is that HYG and our other fixed income iShares ETFs primarily use an “in kind” creation and redemption process, which ensures that the costs of creating and redeeming shares are kept outside the fund.  The transaction costs for creations and redemptions are borne by the transacting investor, and don’t impact other shareholders.

Investors should note that not all fixed income ETFs use the same creation and redemption mechanism employed by HYG. I would recommend that investors do their due diligence on any ETF that they are looking to invest in to ensure they understand the details.

Matt Tucker, CFA is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog.  You can find more of his posts here.

 

Bonds and bond funds will decrease in value as interest rates rise. High yield securities may be more volatile, be subject to greater levels of credit or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity.

Shares of the iShares Funds may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from a Fund by Authorized Participants, in very large creation/redemption units. There can be no assuarance that an active trading market for shares of ETF will develop or be maintained.

Buying and selling shares of iShares Funds will result in brokerage commissions.

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The High Yield Trade: Crowded, or Crowd Pleaser? (Tucker)


Monday, May 7th, 2012

 

by Matt Tucker, iShares

A frequent question that I’ve been getting from our clients is around the outlook for high yield bonds.  With record low rates creating an income challenge for investors, many are now willing to take on the extra risk involved in a high yield investment in order to potentially add yield to their portfolios – as evidenced by the $29.0 billion in flows into HY mutual funds and ETFs so far this year.  Companies have responded to all this demand by issuing $115.1 billion in new high yield bonds YTD, with most of the proceeds going to refinancing existing debt or to fund general operations.  But all this high yield hubbub begs the question:  Is the high yield trade too crowded?

First, let’s review how much more room exists for positive returns.  Almost half of high yield’s 4.55% year-to-date return can be attributed to coupon payments, while the remainder was due to capital appreciation from tightening HY credit spreads (currently hovering around 5.5% over US Treasuries, compared to their average level of 6% over the past 10 years).  Today’s spreads are lower in part because the level of corporate bond default has been low, at around 2%.  In fact, spreads have typically been 4-5% in similar favorable credit environments, so spreads are actually wide relative to the level of corporate defaults (see chart below).

So why are spreads higher than default rates would seem to suggest?  The answer is volatility and uncertainty.  The forward path of the US economy is still somewhat murky.  Our view is that we will remain in a period of low but steady growth for a while, but there are risks that we could see another downturn.  The European debt crisis is the other major market dynamic weighing on investors.  As the crisis continues without a clear long term solution, investors are naturally more skittish.  This skittishness, along with the concerns about the US economic outlook, results in investors demanding a higher level of yield for taking on high yield corporate bond risk.  The extra risk premium is what is keeping credit spreads higher than the default outlook would suggest.

Overall, high yield spreads appear to be at a reasonable level, since investors are being paid both for the level of defaults as well as the level of global investment uncertainty.  If you are an investor with a long-term time horizon and can handle some volatility, then high yield could still be an attractive place to invest.  If high yield spreads reach levels seen in 2004-2006, the bonds could have additional capital appreciation.  However, investors have to be aware that negative economic surprises, especially in the US or Europe, could impact prices along the way.

With all this discussion of high yield bonds, it’s important to think about the suitability of these investments in your portfolio.  While HY experiences about half the volatility of equities, the bonds are still more volatile than investment grade bonds.  However, with yield levels around 7%, yield-hungry investors may find them worth the risk.

 

Sources: Barclays Capital, Moody’s, Morningstar and Bloomberg as of 3/30/2012

Bonds and bond funds will decrease in value as interest rates rise. High yield securities may be more volatile, be subject to greater levels of credit or default risk, and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity.

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Inflation Anxiety is Spooking Investors (Tucker)


Wednesday, May 2nd, 2012

 

by Matt Tucker, iShares

Investors are spooked. They are so spooked that they are buying an asset that currently has a negative yield. What is the culprit causing so much concern? Curiously, it’s inflation. Investors appear to be so concerned about inflation that they are seeking protection against it without much regard to the cost of that protection.

This phenomenon is playing out in the market for Treasury Inflation Protection Securities, or TIPS. The US Treasury auctions TIPS securities every six weeks. In the last few auctions, the demand for TIPS by investors has been oversubscribed by almost 3X.  All this demand for inflation protection has contributed to negative real yield level across the entire TIPS curve.

Why might investors be clamoring for inflation protection?

TIPS are the only financial asset that directly protects an investor’s principal from changes in realized inflation.  While real estate and commodities are indirect means of inflation protection, the principal on TIPS adjust with changes in the non-seasonally adjusted consumer price index. But current levels of volatility are making it difficult for businesses and investors to know if this is a risk they should hedge. The uncertainty regarding the direction and impact of inflation is at 30-year highs.  The chart below show the volatility of the CPI index over the past 50 years.

What is making this sudden increased demand for inflation protection so curious is that despite the rapid expansion of the money supply in the past four years, inflation has not gotten out of control. In fact a warmer winter caused deflation of 0.5% in the fourth quarter of last year as energy prices fell. While the money supply has increased as the Fed has injected liquidity, the weak economy and tight lending environment have not put upward pressure on prices. All this liquidity has not translated into current inflation.

For investors, having a strategic allocation to TIPS or the iShares Barclays TIPS Bond Fund (TIP) as part of an overall portfolio may be prudent. However, it might make sense to ask yourself what your view is on inflation before investing in TIPS. Negative real yields in this context may be viewed as the “cost” of realized inflation protection, so you should have a view on how long that cost will likely be incurred before the payoff in actual inflation occurs.

No matter what your view is on inflation, you can look at these signposts for keys to future inflation – bid-to-cover ratio at TIPS auctions, flows into TIPS investments like ETFs, monthly changes in the CPI and market expectations of future inflation through “breakeven inflation” levels (the difference between nominal and real rates). Hopefully these clues will give you some guidance on when to add inflation protection to your portfolio.

 

 

Bonds and bond funds will decrease in value as interest rates rise. TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Government backing applies only to government issued securities, not iShares exchange traded funds.

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Corporate Bond Intrigue (Video)


Monday, March 26th, 2012

  
Despite the sluggish economy, US corporations have a few good things going for them right now.   Does this translate to their ability to repay debt?  Spend a minute with Matt Tucker as he explores the current case for corporate bonds.

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Bond ETF Idea: Commercial Mortgage Backed Securities


Tuesday, March 6th, 2012

by Matt Tucker, Managing Director, Fixed Income,  iShares

ABS, MBS, CMBS.  Navigating your way around the various fixed income sectors can sometimes feel like a bowl of alphabet soup.  And with the proliferation of fixed income ETFs giving investors more ways than ever to slice and dice the bond market, now’s a great time to brush up on your acronyms.

Take, for example, commercial mortgage-backed securities (CMBS).  CMBS are fixed income securities that are backed by loans on things like office buildings, retail properties, and hotels.  The sector currently represents about 2% of the US fixed income market.

For investors who have a positive view on the commercial real estate market, CMBS are a way to gain exposure with less risk than real estate investment trusts (REITS).  Since its inception six years ago, the Dow Jones US REIT Index has experienced volatility of 30.1% and a return of 2.6%, whereas the Barclays Capital US CMBS Index experienced a volatility of 13.3% and a return of 6.63% during the same timeframe.  Keep in mind that REITS are equity securities, whereas CMBS are debt securities.

CMBS also have a compelling income component – compared to sectors that have a similar duration (a measure of bond risk), investment grade CMBS are currently offering a higher yield.  Note that in the chart below, CMBS is represented by the Barclays Capital US CMBS Index, which only includes investment grade bonds – there are no subprime bonds in the index.

Fixed Income Sector Comparison

With the recent launch of the iShares Barclays CMBS Bond Fund (NYSE Arca: CMBS), the first ETF dedicated solely to CMBS, investors now have the ability to gain diversified access to this sector in a single trade.  We expect to see clients using this fund in a few different ways.  One idea: if the investor prefers an overweight to CMBS, they can use it to complement a diversified bond index fund (such as the iShares Barclays Aggregate Bond Fund; NYSE Arca: AGG).  Or they may use it in conjunction with other bond index funds to build a customized fixed income portfolio.

 

Source: Bloomberg

Chart Source: Barclays Capital and iBoxx as of 2/21/2012. Past performance does not guarantee future results.  Fixed income sectors are represented by the following indexes –   Barclays Capital U.S. CMBS (ERISA Eligible) Index, Barclays Capital U.S. Agency Index, Barclays Capital 3-7 Year US Treasury Index, Barclays Capital U.S. MBS Index, Barclays Capital Intermediate U.S. Credit Index, iBoxx $ Liquid High Yield Corporate Bond Index, Barclays Capital U.S. Aggregate Index

Bonds and bond funds generally decrease in value as interest rates rise. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. Commercial mortgage-backed securities (“CMBS”) represent interests in “pools” of commercial mortgages and are subject to credit, prepayment and extension risk, and therefore react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly and significantly reduce the value of CMBS. Diversification may not protect against market risk.

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