The trend of recently strong performance for investment grade credit continued, but admittedly, the magnitude of the relatively strong results began to wane. The performance of the financials sector drove the overall Barclays US Corporate Index performance for the quarter, while utilities delivered a slightly negative result. Despite a rally in risk assets that has seemingly grown rather extended, investor demand for the US corporate bond asset class continues to be rather strong. Strong inflows into the asset class helped to absorb over $200 billion in net supply of investment grade credit debt during the quarter – a level of issuance that would rival full-year periods in years preceding the 2008 financial crisis.As noted above, the high yield market posted strong results during the quarter, with the BofA Merrill Lynch US High Yield Cash Pay Constrained Index returning 5.06%. From a ratings perspective, lower-quality ratings categories broadly outperformed higher-quality bonds. Corporate fundamentals remained healthy, with liquidity levels and net leverage ratios at manageable levels. The first quarter saw over $100 billion in new debt issued, which was met with robust investor demand as the asset class as a whole saw strong inflows during the quarter, providing opportunities for companies to refinance short-term debt into longer-term debt. In addition, defaults remained low and well below historical averages. Performance Review For the first quarter of 2012, the Fund posted a net asset value total return of 2.23% and a market price total return of 6.69%. On a net asset value basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the “Index”), which returned 1.25% for the quarter. 2 The Fund's outperformance was primarily driven by its positions in emerging markets debt, although the total weight in emerging markets debt was slightly less than that in the benchmark. In particular, the Fund's local market exposures, including its overweight to Brazil, were positive for performance. The Fund's exposure to local currencies also benefited results. Elsewhere, allocations to higher yielding US dollar-denominated sovereign debt from Eastern European countries were beneficial, as were its holdings of US dollar-denominated sovereign and quasi-sovereign bonds from the Middle East. 3 The Fund's spread sector exposures generally contributed to performance. In particular, allocations to residential mortgage-backed securities were additive for performance, as was its exposure to commercial mortgage-backed securities (CMBS) and high yield bonds. Investment grade bond exposure was a modest contributor to performance as spreads narrowed. In general, allocations to spread investments were rewarded as spreads tightened.
Yield curve positioning in the US was a modest detractor from performance. The Fund was positioned for a flattening of the US yield curve. However, the US curve steepened during the quarter, as long-term Treasury yields mover higher than their shorter-term counterparts.Outlook We feel that the US economic expansion will continue in 2012, although growth will likely be far from robust. Against this backdrop, we expect the Federal Reserve Board to maintain its accommodative monetary policy to support the economy. We also expect core inflation in the US to remain relatively well contained. Against this backdrop, we have a positive outlook for the spread sectors. However, we expect to see periods of heightened short-term volatility. As was the case at times during 2011, this could be driven by macro issues, such as fears of contagion from the European sovereign debt crisis and concerns for global growth, and especially growth (or lack of it) in certain developed countries. We maintain our positive long-term outlook for the emerging markets debt asset class. While global growth is generally moderating, most emerging market countries continue to have superior growth versus their developed country counterparts. In addition, solid fundamentals, including stable reserves, generally solid fiscal situations and lower indebtedness could be supportive for emerging markets sovereigns, quasi-sovereigns and currencies. We also feel that demand for emerging markets debt will be strong overall, given investors' search for yield in the low interest rate environment. Against this backdrop, we feel that additional spread tightening is possible as the year progresses. That being said, the asset class could also experience periods of increased volatility. 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 Spreads refers to differences between the yields paid on US Treasury bonds and other types of debt, such as emerging market bonds. 2 The Strategic Global Benchmark is an unmanaged index compiled by the advisor, constructed as follows: 67% Citigroup World Government Bond Index (WGBI) and 33% JPMorgan Emerging Markets Bond Index Global (EMBI Global). Investors should note that indices do not reflect the deduction of fees or expenses. 3 Quasi-sovereign bonds are securities issued by entities supported by the local government.