Market Review as of 09/30/2015

Major categories of U.S. fixed-income securities posted mixed returns in the third quarter of 2015, as high-grade fixed income rallied and higher-yielding categories posted declines.  The market continues to speculate on the timing of the U.S. Federal Reserve’s (the Fed) interest-rate hikes, as the September meeting of the Fed’s policy-setting arm, the Federal Open Market Committee (FOMC), seemed to provide more questions than answers and left interest rates unchanged. Global equity markets initially rallied, sending high-quality fixed-income assets lower, but subsequently fell drastically, causing a flight-to-quality, as investors became uneasy regarding overarching global strength. While 13 out of 17 of the Fed’s own officials still predict that a rate hike will occur in 2015, the number is down from June, when 15 out of 17 officials held that view.

Following its policy meeting on September 16–17, the Fed released a statement suggesting that U.S. economic growth had expanded moderately, as household spending and business fixed investment increased. However, the Fed noted that exports have been soft and that inflation continues to run below the FOMC’s longer-run objective. During the meeting, the Fed decided to keep the targeted fed funds rate at 0–0.25%, and reiterated that it would not be appropriate to raise the target range until it sees further improvement in the labor market and is “reasonably confident” that inflation will move back to the stated objective of 2% annually over the medium term.1 Fed policymakers’ median estimate for the fed funds rate was reduced to 0.4% for the end of 2015, although this still implies a rate hike later this year.2

Weak economic data, particularly out of China, combined with the Fed’s decision to hold rates steady during its September meeting was a tailwind for debt of the U.S. government.  U.S. Treasuries (as represented by the BofA Merrill Lynch U.S. Treasury Index3) posted a return of 1.90% for the three-month period ended September 30, 2015.  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 Index4) returned 1.70%. Overall creditworthiness in the municipal bond market continues to improve, as most states’ finances experienced rising revenues while maintaining balanced budgets.

Government-related securities of the fixed-income market outperformed credit-sensitive segments in the third quarter, as the market experienced a general flight-to-quality. The high-yield bond market (as represented by the BofA Merrill Lynch U.S. High Yield Constrained Index5) posted a return of -4.88% for the quarter. The floating-rate loan market (as represented by the Credit Suisse Leveraged Loan Index6) returned -1.23%, reflecting strong relative performance against the high-yield bond market. The convertible bond market (as represented by the BofA Merrill Lynch All Convertibles, All Qualities Index7) returned -7.14%, suffering from underlying declines in equities, in large part due to the fears of an economic slowdown in China.

Among higher credit-quality securities, investment-grade corporate debt (as represented by the Barclays U.S. Corporate Bond Index8) posted a return of 0.83%. Agency mortgage-backed securities (as represented by the Barclays MBS Index9) gained 1.30%. Commercial MBS (CMBS) (as represented by the Barclays U.S. CMBS Investment Grade Index10) returned 1.54%.

U.S. inflation declined in the third quarter due largely to a sharp decline in gasoline prices. However, the Consumer Price Index (CPI)11  for all items, less food and energy, increased 0.1% in both July and August, the overall CPI increased 0.2% over the 12-month period ending in August 2015, and remains below the Fed’s target of 2.0%. The CPI, excluding volatile food and energy prices, remained stable at 1.8%.12

The U.S. labor market continued to strengthen in the third quarter, albeit at a slower pace. The U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 173,000 in August, below the average monthly gain of 247,000 over the prior 12 months, while the unemployment edged down to 5.1%.13

High-yield new-issue volume was subdued in the third quarter, and totaled only $59.7 billion, a 38% decline from the previous quarter and the lowest quarterly total since the second quarter of 2012. Year to date, high-yield issuance has been $251 billion, down approximately 12% year over year.  Institutional loan issuance totaled a little more than $266 billion, down 35% 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 expected defaults in the troubled energy sector.  Excluding energy, they forecast high-yield bond and loan default rates of 1.5% for 2015 and 2016, both of which are well below their long-term averages of 3.6% and 3.3%, respectively.

Fund Review as of 09/30/2015

The Fund returned 0.62%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended September 30, 2015. The Fund’s benchmark, the Barclays U.S. Aggregate Bond Index,14 returned 1.23%. 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 September 30, 2015, are: one year: -0.34%; five years: 2.70%; and 10 years: 4.53%.  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

Volatility in recent months has been elevated, and risk premiums have been rising. While the apparent catalyst for the sharp market moves experienced in August and September was the People’s Bank of China’s (PBoC) devaluation of the Chinese renminbi, which amplified concerns about potential for slower growth in China, market concerns seem to have broadened to include persistent softness in commodity markets, emerging markets weakness, rising default risk, and lower prospects for global growth. These concerns have resulted in spreads widening in many sectors of the fixed income market throughout the quarter, especially corporate fixed income. As valuations grew more attractive early in the period, we increased the portfolio’s allocation to credit-sensitive assets, with a focus on higher grade securities, where we believe the fundamentals remain strong and can withstand further economic deterioration. As a result, the portfolio’s performance lagged as spreads continued to widen throughout the period. We believe the portfolio is currently well positioned, with its emphasis on high-grade assets, to withstand any deterioration in the global economic climate, although it may continue to experience performance volatility.

Our allocations to ‘BBB’-rated investment grade corporates were a drag on relative performance. Within our investment grade corporates allocation, we maintained our preference for ‘BBB’-rated corporates. We believe firms in this segment of the corporate market are hesitant to increase leverage in order to protect their investment grade rating and, therefore, represent an attractive risk-return profile.

Within the securitized sector, the portfolio’s overweight allocation to asset-backed securities (ABS) contributed positively to performance over the period. The exposure to ABS has continued to be a source of liquidity to the portfolio, while providing strong risk-adjusted returns. Within agency mortgage-backed securities (MBS), we maintained our persistent relative underweight to the sector which also contributed positively to performance during the period.

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


The Fed seems to have taken a backseat to the market’s fears regarding China, and the potential impact that a significant slowdown in Chinese growth would have on the global economy. Although we believe that the Fed will remain a driving force throughout the remainder of 2015, there appears to have been a drastic shift in overall investor sentiment toward Fed actions. Previously, investors had interpreted dovish actions from the Fed as a tailwind for risky assets; however, this has appeared to reverse throughout the year. As uncertainty edges up regarding the state of the global economy, investors increasingly are calling into question how insulated U.S. growth will remain from a stumbling global economy.

While official Fed projections still indicate a rate hike sometime in 2015,2 market-implied projections continued to call for a later rate hike than the Fed’s projections, as they have been for the past several years.15  The overall market reaction to the Fed’s decision to keep rates steady, along with an unexpectedly dovish tone during the most recent policy meeting in mid-September, indicates a rising fear that China’s sluggish growth and continued uncertainty regarding deflation in Europe could eventually lead the U.S. economy to falter.  Investors will continue to monitor closely key economic data for an indication that the Fed might have sufficient justification to reverse its historically easy monetary policy; however, investors remain much more wary of the implications of a dovish Fed.

We continue to maintain a generally up-in-quality bias across portfolios, emphasizing liquidity and flexibility, but we continue to 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, although subpar pace. We still view credit-sensitive sectors of the market as representing attractive relative value, although we do believe 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 that despite the relative attractiveness of lower-quality assets on a spread-adjusted basis, it is prudent to maintain a higher credit-quality bias until greater market clarity is achieved.

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