Taxable Fixed Income Commentary 1Q2011

The first quarter delivered modest returns for fixed income investors as yields rose overall and credit spreads held mostly steady. An assortment of risks ranging from macro, to geopolitical, to a major earthquake in Japan, impacted investor sentiment during the quarter, resulting in increased volatility in yields and risk asset prices. 10-year Treasury yields began the quarter at 3.33% and rose to 3.75% by mid quarter, before being driven down to 3.17% in mid March by flight-to-quality flows due to the Japanese earthquake. Yields ultimately finished around 3.5%, roughly 17 basis points higher from year-end. Broad bond market returns were positive, with the Barclays Aggregate index returning 0.42% for the quarter, with long-end Treasuries lagging and lower quality credit outperforming. Within Treasuries, Treasury Inflation-Protected Securities (TIPS) were the exception, as rising inflation expectations and spiking oil prices drove TIPS valuations higher, leading to a 2.0% return for the sector. High yield credit again lead performance for the quarter, returning 3.88%.