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With relief that the worst of the "fiscal cliff" had passed without calamity, investors embraced risk throughout much of the first quarter of 2013. As a result, major equity indexes surged, highlighted by several record-high closing levels.
Despite the equity market's milestones, the Treasury market remained range bound, with the 10-year note yielding about 1.85%, according to Bloomberg. The Federal Reserve's program to purchase $85 billion in Treasury securities and agency mortgage-backed securities (MBS) per month may have limited the increase in yields, even as Fed members became more vocal about the potential risks of further quantitative easing.
Some suggestions about how policy might be adjusted were discussed at the Federal Open Market Committee in late January 2013. In addition to proposing to vary the pace of the asset purchases, another suggestion was that the Fed could hold securities on its balance sheet for longer than initially planned.
Discussions about adjusting monetary policy were held amid a notable improvement in labor market conditions. In particular, the U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 236,000 in February, while the unemployment rate fell to 7.7%. Many observers regarded this as an encouraging report, considering that it reflected the looming sequestration of $85 billion in automatic federal spending cuts that took effect on March 1, as well as the 2% hike in payroll taxes and the increase in the top marginal tax rate that were part of the tax package that passed in early 2013.
Meanwhile, the annual rate of inflation in February 2013 remained consistent with the Fed's stated long-term target of 2.0%. The Consumer Price Index (CPI)1—on an all-items basis and core basis, which excludes food and energy—rose by 2.0%, according to the Bureau of Labor Statistics.
Investors' increased comfort with risk was reflected in fixed-income asset classes, as the convertible bond market posted a quarterly return of nearly 7.6%, followed by the high-yield bond market with a gain of about 2.9%, and the floating-rate loan market with a positive return of about 2.4%. The municipal bond market managed a positive return of 30 basis points (bps), and government securities posted a loss of about 16 bps, according to Bloomberg.
The Fund returned 3.11%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2013. The Fund's benchmark, the Barclays U.S. Aggregate Bond Index,2 returned -0.12% in the same period. A blended index of 60% BofA Merrill Lynch High Yield Master II Constrained Index,3 20% BofA Merrill Lynch All Convertible Index,4 and 20% Barclays U.S. Aggregate Bond Index2 returned 3.22%. The blended index is more representative of the diversified nature of the Bond Debenture Fund than is the Barclays U.S. Aggregate Bond Index, which includes only investment-grade securities. Average annual total returns, which reflect performance at the maximum 4.75% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of March 31, 2013, are: one year: 5.19%; five years: 7.69%; and 10 years: 7.66%. Expense ratio: 0.96%.
Performance data quoted represent past performance, which does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The investment return and principal value of an investment in the fund will fluctuate so that shares, on any given day or when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, call Lord Abbett at 1-888-522-2388 or visit us at www.lordabbett.com.
As investors continued to embrace risk, credit-risk sectors of the bond market outperformed Treasuries in the quarter. Convertibles posted strong returns; consequently, our underweight in the sector detracted from the Fund's relative performance. This was partially offset, however, by security selection within the sector, which contributed positively to relative performance.
High yield posted solid returns as credit fundamentals remained good overall and investors' continued search for yield supported the market. The portfolio's security selection as well as overweight in high yield contributed materially to the Fund’s relative performance during the period.
Security selection within the portfolio's investment-grade allocation was also a material contributor to relative performance. Within investment-grade bonds, the portfolio maintained no exposure to U.S. Treasuries, as we continue to see better relative value in corporates.
The majority of industries within the Fund contributed positively to absolute performance. Among the industries that contributed the most were energy and health care. Among those that contributed the least were real estate and utilities.
During the period, investors continued their hunt for yield, and as a result, lower-quality credits outperformed higher-quality credits. Although the Fund increased its allocation to 'CCC' rated securities over the period, its overall underweight to 'CCC' rated securities during the quarter detracted from relative performance as 'CCC' rated securities were the best performing credit quality category within the high-yield market.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
At its late-January Federal Open Market Committee meeting, the Fed committed to keeping rates low and continuing its policy of quantitative easing, purchasing $85 billion of agency MBS and Treasuries per month, for as long as it takes to bring unemployment down to below 6.5% and as long as inflation remains less than 2.5%. That implies the fed funds rate might remain near zero for as long as another two years. During the meeting, the Fed also discussed various ways it might adjust monetary policy, including varying the pace of asset purchases and holding securities on its balance sheet for longer than initially planned. In the meantime, there is still the backdrop of recessionary conditions and debt problems in Europe—with Cyprus replacing Greece as the poster child of fiscal irresponsibility, ongoing unrest in the Middle East, and decelerating economic activity in the emerging markets, all with the potential to roil the financial markets.
We continue to see a shortage of yield and good fundamentals driving demand for the high-yield asset class. Given certain market technicals, we do not anticipate further significant spread tightening, but continue to find good relative value in corporates versus Treasuries. The market also continues to be supported by accommodative monetary policy by central banks. We are thus monitoring the interest-rate sensitivity of the portfolio. The convertibles sector has performed well during the first quarter of 2013, and we believe it should continue to provide good value. We are seeking additional attractive opportunities in that sector.
Performance data quoted is historical. Past performance is not indicative of future results. Current performance may be higher or lower than the performance quoted. The investment return and principal value of an investment in the Fund will fluctuate so that shares, on any given day or when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent quarter-end, go to quarter ending performance on our Website or call Lord Abbett at (888) 522-2388.
1 The Fund’s dividend yield is shown without sales charges (at NAV) and with maximum sales charges (at MOP). The Fund’s dividend yield takes into account any fee waiver or expense limitation arrangements, if any. Without such fee waivers or expense limitation arrangements, the Fund’s dividend yield would have been lower. Information regarding any fee waivers or expense limitation arrangements applicable to the Fund is provided with the Fund’s expense ratio information.
2 The Fund’s unsubsidized dividend yield is shown without sales charges (at NAV) and with maximum sales charges (at MOP). The Fund’s unsubsidized dividend yield reflects what the yield would have been without the affect of fee waivers or expense limitation arrangements.