Market Sector Update
- The U.S. economic rebound witnessed in
the Q2 continued into Q3. Third quarter
growth is widely expected to be around
- While the yield on the 10-year U.S.
Treasury ended the quarter near where it
started, we saw continued volatility in
long Treasury rates.
- The International Monetary Fund (IMF)
has significantly lowered its global
growth projections for the next year. The
better economic growth in the U.S.,
while still rather anemic, is one of the
few bright spots in their forecasts.
- Global weakness has led to an increased
flight to quality trade and helped lower
the yields on the long end of the
Treasury curve. The strength in our
domestic economy and improvement to
our jobs market has led the Federal
Reserve (Fed) to contemplate raising
U.S. short-term interest rates in 2015.
While the 10-year Treasury has rallied
nearly 65 basis points year to date, the
yield on the two-year Treasury has sold
off nearly 15 basis points. The dynamics
leading to this flatter yield curve should
be with us well into next year, in our
- In our view, the market is very data
dependent, and right now it is showing
little conviction in either direction. Yields
appear to be at the low end of a recent
volatile trading range. It does not take
much news for the market to make a
significant move to higher or lower rates.
- We think investment-grade corporate
credit offers the best risk-adjusted
spread cushion of the major sectors in
the high-grade fixed income market.
We have been overweight corporates
over the last few years and plan to
continue this overweight position as
2014 progresses. With economic
conditions improving in the U.S., we
could see a continued narrowing of
corporate bond spreads.
- Net new issuance of mortgage-backed
securities (MBS) has fallen sharply since
the first of the year, more than offsetting
the impact from the Fed’s taper. In the
current low volatility environment,
moreover, we expect MBS to
outperform Treasury securities through
the end of the year. Our mortgage
holdings are structured to experience
less extension risk during periods of
rising interest rates. Also, agency
mortgage bonds provide a stable source
of income for the portfolio, and we
continue to look for opportunities to
increase agency holdings.
- We remain underweight Treasury
bonds, especially at the very short end
of the curve, and overweight high-grade
spread product. We are committed to
seeking stable income at the best
- The Fed has reiterated its intention to
keep the fed funds rate near zero for an
extended period of time. With the short
end of the yield curve anchored by the
low fed funds rate, we expect to see
continued volatility in the middle and
longer end of the curve. Even slight
changes in the U.S. economic outlook
can have significant short-term effects
on longer duration securities.
- We anticipate relatively stable
economic growth for the remainder of
2014, led by both consumer and
- While the Fed still appears to be willing
to keep rates low for a long time, they
have indicated a growing desire to
begin to normalize monetary policy
next year. They have indicated the risk
of higher inflation is less of a concern
than the threat of renewed economic
weakness. Many of the downside risks
to the domestic economy that were
present in 2013 have been abating
throughout this year.
- While we still expect some fiscal
tightening, we are not facing another
fiscal cliff from forced sequestration.
For the first time in years, we have a
multi-year budget deal out of
Washington that should help to
remove a major headwind from the
The opinions expressed in this commentary are those of the Portfolio's manager and are current through September 30, 2014. The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.
Risk factors. As with any fund, the value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio may
fall as interest rate rise. These and other risks are more fully described in the Portfolio's prospectus.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available, a summary prospectus, containing
this and other information for the mutual funds offered by Waddell & Reed, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus or summary
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