Market Review as of 12/31/2015

Major categories of U.S. fixed-income securities posted negative returns in the fourth quarter of 2015, as high-grade fixed income declined along with other higher-yielding categories. Market expectations ultimately were confirmed in December, as the U.S. Federal Reserve (the Fed) hiked interest-rates for the first time since 2006. The hike lifted the fed funds target range from 0–0.25% to 0.25–0.50%, however, speculation remains regarding the future pace of interest rate hikes and the effectiveness of existing Fed tools given the unprecedented quantitative easing cycle of the past several years.

Following its policy meeting on December 15–16, the Fed released a statement suggesting that U.S. economic growth has been expanding at a moderate pace, as household spending and business fixed investment continue to increase at solid rates. However, the Fed noted that exports have been soft and that inflation continues to run below the Federal Open Market Committee’s (FOMC) longer-run 2% objective. During the meeting, the Fed decided to raise the targeted fed funds rate by 0.25%, to a target range of 0.25–0.50%, and reiterated that it “expects economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”1 Fed policymakers’ median projected estimate for the fed funds stands at 1.4% for the end of 2016, indicating a 1% increase over the course of the year.2

Both government-related securities and credit-sensitive segments of the fixed-income market posted negative returns in the fourth quarter, as the market considered the impact of a less accommodative Fed on fixed-income assets. U.S. Treasuries (as represented by the BofA Merrill Lynch U.S. Treasury Index3) posted a return of -0.93% for the three-month period ended December 31, 2015.  The high-yield bond market (as represented by the BofA Merrill Lynch U.S. High Yield Constrained Index4) posted a return of -2.16% for the quarter. The floating-rate loan market (as represented by the Credit Suisse Leveraged Loan Index5) returned -1.96%, reflecting slightly stronger relative performance against the high-yield bond market. The convertible bond market (as represented by the BofA Merrill Lynch All Convertibles, All Qualities Index6) returned 0.85%, benefiting from an underlying rally in equities, in large part due to expectations for a growing U.S. economy and a general rotation out of fixed-income assets.

Among higher credit-quality securities, investment-grade corporate debt (as represented by the Barclays U.S. Corporate Bond Index7) posted a return of -0.58%. Agency mortgage-backed securities (as represented by the Barclays MBS Index8) returned -0.10%. Commercial MBS (CMBS) (as represented by the Barclays U.S. CMBS Investment Grade Index9) returned -1.32%.

Despite pockets of distress in high-profile issuers such as Illinois, Puerto Rico, and New Jersey, the municipal bond market (as represented by the BofA Merrill Lynch U.S. Municipal Securities Index10) outperformed most notable asset classes and returned 1.72%. Overall creditworthiness in the municipal bond market continues to improve, as most states’ finances experienced rising revenues while maintaining balanced budgets.

Within emerging markets, the major themes remained Chinese volatility and the impact of commodity weakness. However, accommodative central bank policies helped mitigate weakness in commodities and reduced new debt issuance provided technical support for the asset class. Thus, the emerging markets corporate debt asset class (as measured by the JP Morgan Corporate Emerging Markets Bond Index Broad Diversified Index11) returned 0.44%, outperforming most U.S.-centric fixed-income asset classes

U.S. inflation increases in October were largely offset due to a decline in the energy sector during the month of November. However, the Consumer Price Index (CPI)12 for all items, excluding food and energy, increased 0.2% in November, the same increase as in September and October. The overall CPI increased 0.5% over the 12-month period ended November 2015, and remains below the Fed’s target of 2.0%. The CPI, excluding volatile food and energy prices, however, increased slightly from the previous quarter, to 2.0%.13

The U.S. labor market continued to strengthen in the fourth quarter, albeit at a slower pace. The U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 211,000 in November, slightly below the average monthly gain of 237,000 over the prior 12 months, while the unemployment rate held steady 5.0%.14

High-yield new-issue volume trended lower in the fourth quarter, totaling only $42.3 billion, nearly a 30% decline from the previous quarter, with December’s $4.7 billion marking the lowest monthly total since December 2011. In 2015, high-yield issuance totaled $293 billion, down approximately 18% year-over-year. Institutional loan issuance experienced a second consecutive annual decline, totaling $326 billion, down 30% on a year-over-year basis. J.P. Morgan Securities is forecasting the high-yield default rate to rise, to 3.0%, in 2016, although this is largely due to an expected default rate of approximately 10% in the troubled energy sector. This forecast is based on an expectation that WTI (West Texas Intermediate Oil) averages close to $45 throughout the year. If WTI remains in the mid-$30s, energy defaults would likely increase to 20%, and the overall default rate forecast would increase to 4.5% for 2016. Excluding commodities, J.P. Morgan forecasts high-yield bond and loan-default rates of 1.5% for 2016 and 2017, respectively, both of which are well below their long-term averages of 3.6% and 3.3%, respectively.

Fund Review as of 12/31/2015

The Fund returned -0.85%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended December 31, 2015. The Fund’s benchmark, the Barclays U.S. Aggregate Bond Index,15 returned -0.57%. Average annual total returns, which reflect performance at the maximum 2.25% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of December 31, 2015, are: one year: -0.54%; five years: 3.27%; and 10 years: 4.63%.  Gross Expense ratio: 0.85%. Net Expense ratio: 0.65%. 

Performance data quoted represent past performance, which is no guarantee of 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 888-522-2388 or visit us at

The Fed’s announcement to raise interest rates contributed to continued volatility and spread widening in the fourth quarter of 2015. Given broad global macroeconomic concerns we expect volatility to remain elevated in the near future. As such, we are closely monitoring near-term developments in credit markets with an emphasis on fundamental valuations. During the quarter, we used the market volatility to invest tactically in sectors with outsized fluctuations in valuation. For example, after spreads tightened early in the period, we de-risked the portfolio by reducing the corporate sector allocation, thereby increasing the underweight relative to the benchmark, the Barclays Aggregate Bond Index. As spreads widened again in December, we slightly increased our allocation to risk assets, in an effort to capture favorable valuations.

The portfolio's allocations to investment grade corporate credits, particularly ‘BBB’-rated corporates, were a drag on relative performance as higher grade credits outperformed ‘BBB’-rated corporates. Although 'BBB'-rated corporate credits underperformed during the period, we maintain our preference for issuers of ‘BBB’-rated corporates as we believe these firms represent the best risk-adjusted value among investment grade corporate debt at this stage of the credit cycle.

As we reduced the portfolio’s allocation to asset-backed securities (ABS) during the period, security selection, as well as the overweight allocation to the sector, contributed positively to performance in the fourth quarter of 2015. The team continues to uncover attractive risk-adjusted yields in various sectors of the ABS market, and we continue to expect strong opportunities in this growing sector.

Please refer to under the “Portfolio” tab for a complete list of holdings of the Fund, including the securities discussed above.


The Fed reasserted itself as the major guiding policy force in the fourth quarter, particularly within fixed-income markets. China remains an area of significant concern, as the country has the ability to disrupt global markets, including U.S.-centric fixed-income and equity markets. While the Fed’s liftoff provided some clarity, there still remains uncertainty regarding the pace with which the FOMC will continue to raise rates. Most market participants expect a slow and gradual rise, as has been indicated by Fed language.  However, the effectiveness of the tools at the Fed’s disposal remains a cause for concern, as they seek to normalize policy after unprecedented levels of quantitative easing in recent years. As uncertainty persists regarding the state of the global economy, investors increasingly are calling into question how insulated U.S. growth can remain from the broader global economy still seeking to fully recover from the financial crisis of 2008–09.

Fed policymakers’ median projected estimate for the fed funds rate stands at 1.4% for the end of 2016,2 although market-implied projections indicate a lower rate at the end of 2016.16  The overall market reaction to the Fed’s decision to raise rates in December appeared positive in that spread widening was tempered, offering a drastically different experience when compared to the “taper tantrum” of 2013. Investors will likely continue to monitor closely key economic data, with a particular focus on inflation, for an indication that the Fed might have sufficient justification to accelerate its interest rate-tightening cycle. Similarly, investors will be looking for reassurance that if U.S. growth stagnates, the Fed will be willing to slow its progression in order to support the economy.

We continue to maintain a generally up-in-quality bias across portfolios, emphasizing liquidity and flexibility, but will rotate sectors based on relative value opportunities while conducting fundamental research to find undervalued securities.  Broadly speaking, we remain generally optimistic that the U.S. economy will continue to grow at a steady, albeit subpar, pace. We still view credit-sensitive sectors of the market as representing attractive relative value, although we do believe that there is the potential for episodes of further spread widening as the market continues to search for answers regarding China and its effect on the U.S. economy.  As a result, we believe it is prudent to maintain a higher credit-quality bias, although we think valuations at their current levels may justify taking advantage of the relative attractiveness of lower-quality assets on a spread-adjusted basis.

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