Strategic Global Income Fund, Inc. (the "Fund") (NYSE: SGL) is a non-diversified, closed-end management investment company seeking a high level of current income as a primary objective and capital appreciation as a secondary objective through investments in US and foreign debt securities.
Fund Commentary for the second quarter of 2012 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor
In sharp contrast to the first three months of the year when risk appetite was generally robust, risk aversion largely ruled the markets in late April and May. This reversal in investor sentiment was triggered by signs that the US economy was decelerating, as well as fears of contagion from Europe. Risk appetite returned in late June, given some positive developments in Europe and expectations for another round of quantitative easing by the Federal Reserve Board (Fed).
The US spread sectors (non-US Treasury fixed income securities) experienced periods of volatility during the second quarter, but produced positive absolute returns. While short-term US Treasury yields were relatively stable during the quarter, intermediate and longer-term yields fell sharply, and the yield curve flattened somewhat. At the height of an investor flight-to-quality in early June, the yield on the 10-year US Treasury closed at an all-time low of 1.47%. All told, the overall US bond market, as measured by the Barclays US Aggregate Index, returned 2.06% during the second quarter. Over this period, the spread sectors produced mixed results versus equal duration Treasuries. While US dollar-denominated corporate (both investment grade and high yield) and emerging markets sovereign debt generated the strongest absolute returns during the quarter, asset-backed securities (ABS), mortgage-backed securities (MBS) and commercial mortgage-backed securities (CMBS) posted more moderate gains.
During the second quarter, US dollar-denominated emerging markets debt, as measured by the JP Morgan Emerging Markets Bond Index Global (EMBI Global), posted a return of 2.47%. Although sovereign spreads widened by approximately 33 basis points (bps), declining 10-year US Treasury yields—down from 2.21% to 1.64%—outweighed the detractions and kept the overall market return positive.
Local market investments (in other words, emerging markets debt denominated in the currency of the issuer) delivered weak results, ending the quarter with a loss of approximately 1.21%, based on the JP Morgan GBI-EM Global Diversified Index. Depreciating currencies, versus the US dollar, were the main detractors, while local yields added to the overall performance by following US Treasury yields down from 6.4% at the end of March to 6.1% at the end of the second quarter, as measured by the same index.
For the second quarter of 2012, the Fund posted a net asset value total return of 0.16% and a market price total return of 2.06%. On a net asset value basis, the Fund underperformed its benchmark, the Strategic Global Benchmark (the “Index”), which returned 1.45% for the quarter.
Overall, the Fund's local currency emerging markets debt exposures detracted modestly from performance during the quarter. In particular, our allocation to local currency versus US dollar-denominated emerging markets debt was not rewarded. Among individual local currencies, the Indian rupee and Ghana cedi were the largest detractors, while the Fund’s allocation to US dollar-denominated emerging markets debt was beneficial for results. Longer-term US Treasury yields reached all-time lows during the quarter which, in turn, supported these holdings. In particular, our long duration position in the Middle East was additive for results. On the other hand, spread widening in higher risk countries such as Argentina and Venezuela detracted from results, which offset the positive contribution mentioned above.