Fort Dearborn Income Securities, Inc. (the "Fund") (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 third quarter 2011 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor

Market Review

While the US economy continued to expand, it was far from a robust pace. According to the Commerce Department, second quarter 2011 gross domestic product (GDP) growth was 1.3%, versus a 0.4% expansion during the first three months of the year. This represented the eighth consecutive quarter of positive economic growth. Initial third quarter GDP figures will be released at the end of October and another positive, albeit modest, reading is expected. Economic data released during the third quarter were often disappointing, leading to fears that a double-dip recession could occur. This, coupled with the downgrade of US Treasuries and the escalating European sovereign debt crisis, triggered a substantial flight to quality. At one point during the month, the yield on the 10-year Treasury note fell to 1.72%, the lowest level since the 1940s. Against this backdrop, the spread sectors (non-US Treasuries), such as investment grade credit and commercial mortgage-backed securities (CMBS), generated weak results and underperformed comparable duration Treasuries.

Performance Review

For the third quarter of 2011, the Fund posted a net asset value total return of 6.98% and a market price total return of 7.89%. The Fund, on a net asset value return basis, underperformed the Investment Grade Bond Index (the “Index”), 1 the Fund’s benchmark, which posted a return of 7.50% for the quarter.

Overall, security selection detracted from performance during the quarter. Our investment grade corporate bond holdings, in particular those in the industrials subsector, were detrimental to the Fund's relative results. In contrast, the Fund's positions in the financials and utilities subsectors modestly contributed to performance. Security selection of commercial mortgage-backed securities ( CMBS) and asset-backed securities also slightly detracted from relative results.

Somewhat offsetting the negatives associated with security selection was the Fund's sector allocations. The largest contributor was our positioning within the financials subsector. When the quarter began, the Fund had an overweight in financials. As the period progressed, we pared this exposure and ended the quarter with an underweight versus the benchmark. This adjustment was rewarded, as spreads 2 widened given weakening economic data and fears of contagion from the European sovereign debt crisis. The Fund's overweight to Treasuries was also beneficial, as rates declined across the yield curve and Treasuries outperformed the spread sectors during the quarter. Having an underweight to agency mortgage-backed securities was also rewarded. In contrast, an out-of-benchmark exposure to CMBS was a negative for results as they performed poorly given the flight to quality and concerns of a double-dip recession.

Duration and yield curve positioning did not meaningfully impact the Fund’s performance during the quarter. While we tactically adjusted the Fund's duration, it was roughly neutral to that of the benchmark. Likewise, our positioning on the yield curve did not meaningfully deviate from the benchmark. (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.)


Economic growth in the US has clearly moderated. While the probability for recession has increased, we feel that growth in the US will remain fairly anemic. However, given the uncertainties related to the economy and other macro issues, including the ongoing European sovereign debt crisis, we have taken steps to reduce the Fund's overall risk exposure. In terms of the spread sectors, fundamentals in the investment grade corporate bond market remain solid as profits have been strong, balance sheets are often flush with cash and borrowing costs are extremely low. In addition, valuations in the investment grade corporate bond market have become more attractive given widening spreads in recent months. However, we believe that maintaining a somewhat cautious approach for the portfolio is appropriate give the tenuous macro environment.

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.

2“Spreads” refers to differences between the yields paid on US Treasury bonds and other types of debt, such as emerging market bonds.

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