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 2015 from UBS Global Asset Management (Americas) Inc. ("UBS Global AM"), the Fund's investment advisor

Market review

The global fixed income market largely produced weak results during the second quarter. The overall US fixed income market declined given rising Treasury yields as economic data generally improved. In addition, expectations increased that the Federal Reserve Board (the "Fed") would institute its first rate hike in nearly a decade before the end of the year. All told, the yield on the two-year Treasury rose from 0.56% to 0.64%, whereas the yield on the 10-year Treasury moved from 1.94% to 2.35% during the second quarter. At its meeting that concluded on June 17, 2015, the Fed said "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." Overseas, government yields generally moved higher. Economic growth in both the eurozone and Japan improved, but this was partially overshadowed by the escalating crisis in Greece and fears of contagion.

The overall US bond market, as measured by the Barclays US Aggregate Index, fell 1.68% during the second quarter, while the global government bond markets declined 1.55% over the quarter, as measured by the Citigroup World Government Bond Index (unhedged). 1,2 In contrast, the Citigroup World Government Bond Index (hedged in US dollars) returned -2.66% for the quarter. 3

Sector overview

Most US spread sectors also posted negative total returns during the second quarter, as they were impacted by rising Treasury yields and periods of investor risk aversion. 4 After a strong start in April, the emerging markets debt asset class gave back its gains as the quarter progressed. This turnaround was triggered by rising US Treasury yields, concerns over China's economy and several geopolitical issues. All told, the J.P. Morgan Emerging Markets Bond Index Global (EMBI Global), declined 0.29% during the quarter. 5 Local currency emerging markets debt, as measured by the J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM Global Diversified), declined 0.96% during the quarter. 6

Performance review

During the second quarter of 2015, the Fund posted a net asset value total return of 0.16% and a market price total return of -0.08%. On a net asset value total return basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the "Index"), which returned -1.13% over the quarter. 7

Among the contributors to the Fund's performance were its duration and yield curve positioning. Having a duration that was shorter than that of the Index was rewarded given the rising rate environment. From a yield curve perspective, an underweight to the belly of the curve (7-20 year maturities) was beneficial for performance. The Fund's security selection in a number of sectors was also additive for performance. In particular, our investment grade and high yield corporate bond holdings were positive for returns. Security selection of agency mortgage-backed securities ("MBS") was also beneficial.

On the downside, the Fund's overweights to investment grade and high yield corporate bonds detracted from performance, as their spreads widened. However, this was not enough to offset the benefits of our security selection in the credit space. An out-of-benchmark allocation to MBS was also a drag on results. Elsewhere, the Fund's currency positioning modestly detracted from performance. In particular, an overweight to the US dollar and shorts to the euro and yen were headwinds for the Fund's results.

Within the emerging markets debt asset class, our positioning in Venezuelan and Nigerian dollar-denominated debt, as well as Russian quasi-sovereigns, enhanced the Fund's performance during the second quarter. 8 Brazilian local duration exposure also contributed to the Fund's results. On the downside, an underweight to Ukraine was modestly negative for performance. Investor sentiment for Ukraine improved given ongoing negotiations in its conflict with Russia. However, we maintain our underweight as the country's economic backdrop remains extremely weak, which increases the likelihood of a more difficult debt restructuring.

Outlook

We have an overall positive outlook for the US economy. After a weak start to the year, economic data have improved in recent months. The labor market continues to strengthen. The housing market has shown signs of increased activity, and consumer confidence has risen. That being said, growth for the year as a whole will likely be far from robust. Overseas, economic growth in Europe, while modest, has improved of late, as has growth in Japan. Growth in China remains a concern, although its central bank has a number of tools it can use to help spur its economy.

Turning to the fixed income market, credit spreads widened during the second quarter. Looking ahead, we continue to believe we are in the midst of a "coupon clipping" environment, as we feel we are in the latter stages of the credit cycle. From a rate perspective, much will depend on the Fed's actions. We expect the US central bank to begin the process of normalizing monetary policy in late 2015. While we feel the Fed will take a conservative approach, we believe the uncertainty surrounding rate hikes will lead to periods of volatility in the fixed income market.

We have a cautious but somewhat improving medium-term outlook for the emerging markets debt asset class. Growth in many developing countries is showing signs of strengthening. This, coupled with generally weaker local currencies, could have a positive impact for emerging markets exporters. Finally, inflation is relatively benign overall and, as such, we do not expect to see policy tightening from emerging markets central banks in the near-term. While certain geopolitical issues have been priced into the market in our view, we expect to see continued periods of elevated volatility. Within the asset class, we feel US dollar-denominated debt should outperform local debt for the year as a whole.

     
Portfolio statistics as of June 30, 2015 9
 
Top ten countries (bond holdings only) 10       Percentage of net assets
United States       40.6%
Brazil       5.8
United Kingdom       5.5
New Zealand       3.9
Canada       3.1
Germany       2.7
France       2.4
Mexico       2.3
Russia       1.9
Italy       1.9
Total       70.1%
 

Top ten currency breakdown (includes all securities and other instruments) 11
    Percentage of net assets
United States Dollar     75.1%
Euro     8.3
New Zealand Dollar     4.4
British Pound     3.1
Australian Dollar     2.6
Brazilian Real     1.9
Canadian Dollar     0.8
Mexican Peso     0.6
Russian Ruble     0.4
Swedish Krona     0.1

 

 

Credit quality 12
    Percentage of net assets
AAA     3.9%
US Treasury 13     3.7
US Agency 13,14     2.0
AA     7.3
A     9.3
BBB     24.6
BB     17.9
B     9.2
CCC and Below     2.1
Non-rated     17.3
Cash and other assets, less liabilities     2.7
Total     100.0
   

Characteristics
     
Net asset value per share 15     $9.71
Market price per share 15     $8.27
Duration 16     5.1 yrs
Weighted average maturity     7.7 yrs
 

1 The Barclays US Aggregate Index is an unmanaged broad-based index designed to measure the US dollar-denominated, investment grade, taxable bond market. The index includes bonds from the Treasury, government-related, corporate, mortgage-backed, asset-backed and commercial mortgage-backed sectors. Investors should note that indices do not reflect the deduction of fees or expenses.

2 The Citigroup World Government Bond Index is an unmanaged market capitalization-weighted index designed to measure the performance of fixed-rate, local currency, investment-grade sovereign bonds with a one-year minimum maturity. Investors should note that indices do not reflect the deduction of fees and expenses.

3 The Citigroup World Government Bond Index (hedged in USD) is an unmanaged market capitalization-weighted index designed to measure the performance of fixed-rate, local currency, investment-grade sovereign bonds with a one-year minimum maturity and is hedged back to the US dollar. Investors should note that indices do not reflect the deduction of fees and expenses.

4 A spread sector refers to non-government fixed income sectors, such as investment grade or high yield bonds, commercial mortgage-backed securities (CMBS), etc.

5 The J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) is an unmanaged index which is designed to track total returns for US dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans and Eurobonds. Investors should note that indices do not reflect the deduction of fees and expenses.

6 The J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM) is an unmanaged index which is designed to track the total returns for local currency debt instruments issued by emerging market governments.

7 The Strategic Global Benchmark is an unmanaged index compiled by the advisor, constructed as follows: 67% Citigroup World Government Bond Index (WGBI) and 33% JP Morgan Emerging Markets Bond Index Global (EMBI Global). Investors should note that indices do not reflect the deduction of fees or expenses.

8 Quasi-sovereign bonds are securities issued by entities supported by the local government.

9 The Fund's portfolio is actively managed, and its portfolio composition will vary over time.

10 Excludes exposures obtained via derivatives (e.g., swaps).

11 Forward foreign currency contracts are reflected at unrealized appreciation/depreciation; this may not align with the risk exposure described in the portfolio commentary section which reflects forward foreign currency contracts based on contract notional amount. As of the most recent period end, June 30, 2015, the Fund maintained a risk exposure to non-US dollar currencies equal to approximately 28% of the Fund.

12 Credit quality ratings shown in the table are based on those assigned by Standard & Poor's Financial Services LLC, a part of McGraw-Hill Financial ("S&P"), to individual portfolio holdings. S&P is an independent ratings agency. Rating reflected represents S&P individual debt issue credit rating. While S&P may provide a credit rating for a bond issuer (e.g., a specific company or country), certain issues, such as some sovereign debt, may not be covered or rated and, therefore, are reflected as non-rated for the purposes of this table. Credit ratings range from AAA, being the highest, to D, being the lowest, based on S&P's measures; ratings of BBB or higher are considered to be investment grade quality. Unrated securities do not necessarily indicate low quality. Further information regarding S&P's rating methodology may be found on its website at www.standardandpoors.com. Please note that any references to credit quality made in the commentary preceding the table may reflect ratings based on multiple providers (not just S&P) and thus may not align with the data represented in this table.

13 S&P downgraded long-term US government debt on August 5, 2011 to AA+. Other rating agencies continue to rate long-term US government debt in their highest ratings categories. The Fund's aggregate exposure to AA-rated debt as of June 30, 2014 would include the percentages indicated above for AA, US Treasury and US Agency debt but has been broken out into three separate categories to facilitate understanding.

14 Includes agency debentures and agency mortgage-backed securities.

15 Net asset value (NAV) and market price will fluctuate.

16 Duration is a measure of price sensitivity of a fixed income investment or portfolio (expressed as % change in price) to a 1 percentage point (i.e., 100 basis points) change in interest rates, accounting for optionality in bonds such as prepayment risk and call/put features.

Any performance information reflects the deduction of the Fund's fees and expenses, as indicated in its shareholder reports, such as investment advisory and administration fees, custody fees, exchange listing fees, etc. It does not reflect any transaction charges that a shareholder may incur when (s)he buys or sells shares (e.g., a shareholder's brokerage commissions).

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.

Investing in the Fund entails specific risks, such as interest rate, credit and the risks associated with investing in the securities of non-US issuers, including those located in emerging market countries. The value of the Fund's investments in foreign securities may fall due to adverse political, social and economic developments abroad and due to decreases in foreign currency values relative to the US dollar. Further detailed information regarding the Fund, including a discussion of principal objectives, principal investment strategies and principal risks, may be found in the fund overview located at http://www.ubs.com/closedendfundsinfo . You may also request copies of the fund overview by calling the Closed-End Funds Desk at 888-793 8637.

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