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Investment Commentary

 

A Message from the Portfolio Management Team

By Eric Golden, CFA®, Fidelity Investments Money Management, Inc.* — September 30, 2019



Q3 | 2019 KEY TAKEAWAYS

MONETARY EASING CONTINUED AS THE FED CUT RATES TWICE

  • The U.S. Federal Reserve (the Fed) cut interest rates in July and September in an effort to sustain U.S. economic growth.
  • Further easing will likely be data dependent as the Fed is currently divided on the path forward.

DECLINING INTEREST RATES AIDED STRONG RETURNS

  • Interest rates fell broadly (Chart 1) helping taxable investment-grade bonds generate returns of over 1.3%.1
  • Corporate bonds outperformed both U.S. Treasuries and mortgage-backed securities (MBS).

DIVERSIFIED WITH AN EMPHASIS ON CORPORATE ISSUERS

  • Your account had an emphasis on corporate bonds backed by both financial and industrial issuers.
  • Your account is also diversified with positions in U.S. Treasury and agency mortgage-backed securities.

Market Review


The Fidelity® Core Bond Strategy seeks to generate interest income while limiting risk to principal over the long term.

The U.S. economy, primarily supported by the consumer, remained solid over the period. However, persistent challenges continued to test the strength and resiliency of U.S. economic growth. These include the global slowdown in manufacturing and the uncertain trade environment.

In response, the Fed elected to lower interest rates 0.25% in both the July and September meetings. It remains unclear if the Fed will continue on its path of monetary easing as the Fed governors were split on their September decision.

These factors led to continued volatility in the markets. However, taxable investment-grade bonds were able to generate strong performance. Corporate bonds outperformed U.S. Treasuries and agency mortgage-backed securities, although each generated positive results (Chart 2).

Strategy and Positioning


We continue to diversify your account across the three largest segments of the investment-grade bond market:

  • U.S. Treasuries
  • Agency mortgage-backed securities
  • Corporate bonds

We continued to favor corporate bonds given their financial health and the additional yield they offered over Treasuries, which aided returns during the period. More specifically, we continued to favor the financial and industrial sectors, both of which outperformed issuers within the utility sector in part due to their yield advantage. Positions in U.S. Treasuries and agency mortgages also contributed to positive returns while continuing to provide diversification benefits. This is particularly important if market sentiment becomes negative.

Finally, the overall level of interest rate sensitivity (duration)2 remained roughly five years, which also helped returns as rates declined broadly.

Investment-Grade Bond Market Outlook

Entering the final months of the year, we anticipate market volatility to continue and the resiliency of the U.S. economy to be tested. The market environment will likely be driven by the evolution of the following economic elements:

  • U.S./China trade negotiations
  • The path of Fed policy
  • Consumer spending and sentiment
  • Corporate earnings

Given all this uncertainty, we believe investment-grade bonds will continue to play an important role in client portfolios. They can help provide stability and preservation of capital.