Download Eagle Investment Grade Bond Fund

Eagle Investment Grade Bond Fund
Management
James Camp, CFA
Managing Director and
Portfolio Manager
Joseph Jackson, CFA
Portfolio Co-manager
Characteristics
Total Net Assets
(millions) $45.63
Number of holdings: 140
Top 10 Holdings
US Treasury, 2 1/4, 11/15/25
Inter-American Devel Bk, 1 3/4,
10/15/19
HART 2014-A B
Intl. Bk. Reconstruction & Devel, 0,
10/13/20
US Treasury, 1 7/8, 1/31/22
US Treasury, 2 1/4, 2/15/27
Private Export Funding 4.3
12/15/21
FG G18519
FG G18597
FN MA2239
Please consider the investment
objectives, risks, charges, and
expenses of any fund carefully
before investing. Contact Eagle at
800.421.4184 or your financial
advisor for a prospectus, which
contains this and other important
information about the funds.
Read the prospectus carefully
before you invest or send money.
Market Overview
The broad domestic bond market, as measured by the
Bloomberg Barclays U.S. Aggregate Index, gained 0.82
percent in the first quarter while the yield curve flattened.
The Bloomberg Barclays U.S. Intermediate Gov’t/Credit
Index, the fund’s benchmark, gained 0.78 percent for
the quarter. The U.S. Federal Reserve raised short-term
rates at its March Federal Open Market Committee
meeting while longer-term rates fluctuated but ultimately
finished the quarter flat to lower. The yield on the 10year U.S. Treasury note briefly broke above 2.60 percent
twice in early March but it quickly retreated to the 2.30
percent-2.60 percent range where it has been since the
end of 2016 due to surprisingly dovish language from
Fed officials (see below) and dysfunction in Washington.
Economic data were a bit choppy with a couple notable
misses (e.g., the advance and second estimates for
fourth-quarter gross domestic product, or GDP);
however, the Citi Economic Surprise Index suggests that
data are generally trending above consensus estimates.
Corporate-credit yield spreads (the difference between
corporate bonds and duration-matched Treasuries)
regained their strength mid-quarter to move lower in
February due to a pull-back in new supply and a pick-up
in economic data. However, they gave back some of
those gains after a poor showing by Republicans on
President Trump’s first major legislative issue as well as
increased bond supply in March. The financials sector
led corporate bonds, followed by industrials. Interestrate-sensitive utilities posted positive total returns
but trailed duration-matched Treasuries. Government
and agency bonds were the top performers due to a
strong showing from sovereign securities; meanwhile,
securitized products lagged Treasuries for the period.
Fed Update and Outlook
The probability of a Fed rate increase was 90 percent or
higher for two weeks ahead of the mid-March meeting
so the 0.25 percentage point move was not a surprise.
However, the lack of any meaningful change in the “dot
plot” — or the economic and financial forecasts —
was a dovish surprise that led to falling interest rates
and tightening corporate-credit spreads. The Fed left
its longer-term target rate at 3.0 percent and median
projections suggest there will be two more rate increases
this year and three in 2018. The Fed acknowledged a
firming of business investment in its policy statement but
otherwise suggested conditions were mostly unchanged
from its December meeting. The Fed also tempered
the most recent uptick in the Personal Consumption
FIRST QUARTER | 3/31/17
Expenditures (PCE) price index by highlighting that “core
inflation” (i.e., excluding energy and food prices) is still
running below 2.0 percent and the “symmetric” nature
of its inflation goal. Federal Reserve Chair Janet Yellen
did not address the process or timing for reducing the
Fed’s balance sheet. We believe the Fed simply viewed
its March meeting as an opportune moment to continue
with policy-normalization rather than the beginning of
more-frequent increases necessary to keep the economy
from getting ahead of itself.
Interest rates have not moved significantly since the
unprecedented spike in the first few weeks after
November’s U.S. presidential election. That spike
increasingly appears to have been a “hope” trade
(i.e., hope the new administration will be able to push
through aggressive economic-development legislation)
and that the markets now will wait to see real action in
Washington before pushing rates higher. That notion
was most evident in late March when interest rates
pulled back after the Fed meeting and the Republicans’
failure to replace the Affordable Care Act (Obamacare).
Republicans may be more unified on other parts of the
president’s agenda (e.g., tax reform) but investors saw
just how difficult it may be to get any major legislation
through Congress. Of note, the economy had been on a
decent footing before President Trump took office and
economic data continue to generally show improvement.
The most recent payroll number was better than
expected and real fourth-quarter 2016 GDP growth was
revised to a 2.10 percent annual rate: also greater than
consensus. The PCE price index, the Fed’s preferred
inflation gauge, hit 2.10 percent on a year-over-year
basis, exceeding the Fed’s 2.00 percent target for the
first time in almost five years. However, we expect rates
to bounce around current levels for a while longer until
the market gets more clarity on the prospects of policy
proposals from the Trump administration or some major
deviation from the Fed on issues such as the unwinding
of its balance sheet.
Corporate Bond Overview
Investment-grade corporate bonds, as measured by the
Bloomberg Barclays U.S. Corporate Bond Index, gained
1.22 percent during the first quarter and outperformed
duration-matched Treasuries by 0.38 percentage
points. Corporate-bond spreads held up relatively well
in January and February as investors absorbed a heavy
supply of investment-grade bonds while taking a neutral
stance on market prospects. However, things gave way
in March due to record new-bond issues for the quarter
combined with investor skepticism about the president’s
FIRST QUARTER | 3/31/17
agenda and its odds of getting through Congress. Spreads ultimately
finished 0.05 percentage points lower from Dec. 31 at 1.18 percent: a level
last seen in the fourth quarter of 2014.
Consumer and CEO confidence is still high and economic growth appears
to us to be on solid footing with the rest of the world also catching up.
The weaker U.S. dollar should also help support – or at least not hamper
– corporate earnings growth. However, as mentioned above, the busy
schedule of new-debt offerings is not helping a U.S. corporate sector that
already is greatly indebted. As such, we remain cautiously optimistic on
corporate bonds and will continue looking for opportunities that meet our
risk-return criteria.
mortgage-related collateral. Therefore, they may be more or less sensitive to
prepayment risk, bear different interest rates, and have various average lives
and final maturities.
Past performance is not indicative of future results and investing involves risk, including the risk of
loss. All information as of March 31, 2017. Opinions expressed are the current opinions as of the
date appearing in this material only. This material should not be construed as research or investment
advice. No part of this material may, without Eagle Asset Management’s prior written consent, be
copied, photocopied or duplicated in any form, by any means.
The information provided should not be construed as a recommendation to buy, sell or hold any
particular security. The data is shown for informational purposes only and is not indicative of future
portfolio characteristics or returns. Portfolio holdings are not stagnant and may change over time
without prior notice.
Investing in bonds involves risks that may adversely affect the value of your
investment such as inflation risk, credit risk, call risk, interest rate risk and
liquidity risk, among others. The two most prominent factors are interest rate
movements and the credit worthiness of the bond issuer. Investors should
pay careful attention to the types of fixed income securities which comprise
their portfolios and remember that, as with all investments, there is the risk
of loss of capital.
Sovereign debt instruments are subject to the risk that a governmental entity
may delay or refuse to pay interest or repay principal on its sovereign debt.
A Real Estate Mortgage Investment Conduit (REMIC) is a type of multiclass
mortgage-related security in which interest and principal payments from
mortgages are structured into separately traded securities. These classes
are distinguished by their sensitivity to the prepayment risk of the underlying
Duration incorporates a bond’s yield, coupon, final maturity and call features into one number, expressed in years,
that indicates how price-sensitive a bond or portfolio is to changes in interest rates. Bonds with higher durations
carry more risk and have higher price volatility than bonds with lower durations.
Credit quality is a measure of credit-worthiness of the issuing organization that reflects the likelihood that it will be
able to pay its debt (credit risk). Investment grade refers to securities rated [BBB-] or better by Standard & Poor’s
Rating Services or an equivalent rating by at least one other nationally recognized statistical rating organization or,
for unrated securities, those that are determined to be of equivalent quality by the fund’s portfolio managers.
Benchmark Index
Investors may not make direct investments into any index.
The Barclays Intermediate Government/Credit Bond Index includes U.S. Government and investment grade credit
securities that have a greater than or equal to one year and less than ten years remaining to maturity and have
$250 million or more of outstanding face value. It is not possible to invest directly in an index.
Barclays U.S. Aggregate Bond Index covers the USD-denominated, investment-grade (rated Baa3 or above by
Moody’s), fixed-rate, and taxable areas of the bond market. This is the broadest measure of the taxable U.S. bond
market, including most Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollardenominated issues, all with maturities of 1 year or more.
EFD-0417-570, Exp. 7/31/17
880 Carillon Parkway | St. Petersburg, FL 33716 | 727.567.8143 | 800.421.4184 | eagleasset.com
Not FDIC Insured
May Lose Value
Eagle Fund Distributors, Member FINRA
No Bank Guarantee