Fort Dearborn Income Securities, Inc. (NYSE: FDI) is a closed-end bond fund managed by UBS Global Asset Management (Americas) Inc. The Fund invests principally in investment grade, long-term fixed income debt securities. The primary objective of the Fund is to provide its shareholders with:
  • A stable stream of current income consistent with external interest rate conditions; and
  • A total return over time that is above what they could receive by investing individually in the investment grade and long-term maturity sectors of the bond market.

Fund Commentary for the fourth quarter of 2010 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor

Market Review

Yields across global fixed income markets moved higher in the fourth quarter of 2010. In the US, the announcement of a second round of quantitative easing by the Federal Reserve and notable improvement in economic data were met with a marked selloff in the US Treasury market. For the quarter, US Treasury yields moved higher, with yields on two-year and 10-year Treasuries rising by 0.17% and 0.78%, respectively.

Performance Review

For the fourth quarter of 2010, the Fund posted a net asset value total return of -2.42% and a market price total return of 0.67%. The Fund, on a net asset value return basis, outperformed the Investment Grade Bond Index (the “Index”), 1 which posted a weaker return of -3.13%% for the quarter. In a continuation of the trend we saw in the third quarter, sector allocation was the primary driver of outperformance. Our overweight to investment grade corporate bonds, particularly among financials and industrials, was the largest contributor in this area. We also generated strong results from our position in commercial mortgage-backed securities. Conversely, our underweight position in agency mortgage-backed securities detracted from relative returns during the quarter.

Duration positioning had a positive impact on the Fund’s performance. We maintained a modestly short duration posture, which provided some cushion given the sharp increase in interest rates in December. Yield curve positioning was effectively neutral. (Duration is a measure of a portfolio’s sensitivity to changes in interest rates. The yield curve plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.)

Outlook

The complexities that surround the high degree of unconventional monetary stimulus, the ongoing sovereign credit concerns in the European Union, and the sustainability of economic growth and corporate profitability in global economies leave the future direction of interest rates highly uncertain. The transitions that the global and US economies have been undergoing now for more than three years have yet to be fully completed, and economies remain prone to shocks that may be uncharacteristically magnified, given the tenuous state of asset, currency, financial and labor markets. Despite economic growth exhibiting some renewed momentum, we expect that monetary policy will be quite accommodative, as we expect the Fed will be on hold for the foreseeable future until slack in the economy, as evidenced by a stubbornly high unemployment rate and low capacity utilization, exhibits sustainable improvement. We continue to believe that the current economic and interest rate environment, characterized by moderate, noninflationary growth coupled with exceptionally low interest rates, is supportive of sustainable profit growth and for spread product (i.e., non-Treasury debt) more generally.

Disclaimers Regarding Fund Commentary - The Fund Commentary is intended to assist shareholders in understanding how the Fund performed during the period noted. Views and opinions were current as of the date of this press release. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the Fund and UBS Global AM reserve the right to change views about individual securities, sectors and markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund’s future investment intent.

Past performance does not predict future performance. The return and value of an investment will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Any Fund net asset value ("NAV") returns cited in a Fund Commentary assume, for illustration only, that dividends and other distributions, if any, were reinvested at the NAV on the payable dates. Any Fund market price returns cited in a Fund Commentary assume that all dividends and other distributions, if any, were reinvested at prices obtained under the Fund's Dividend Reinvestment Plan. Returns for periods of less than one year have not been annualized. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund dividends and other distributions, if any, or on the sale of Fund shares.

1 The Investment Grade Bond Index is an unmanaged index compiled by the Advisor, constructed as follows: From 12/31/81 to present—5% Barclays Capital US Agency Index (7+ years), 75% Barclays Capital US Credit Index (7+ years), 10% Barclays Capital US MBS Fixed Rate Index (all maturities) and 10% Barclays Capital US Treasury Index (7+ years). Investors should note that indices do not reflect the deduction of fees and expenses.

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