Credit market volatility subsided from the second quarter’s levels to a more normalized environment but uncertainty remained and risk sentiment continued to be driven by domestic fiscal and monetary policies. One clear example of this is the Federal Reserve’s recent surprise announcement of no reduction in current quantitative easing (QE), citing that data have not been strong enough to justify scaling back asset purchases just yet. The Fed continued to reiterate its “data dependent” stance as recent consumer and housing weakness pointed to the need for continued accommodation. The immediate rush back into Treasurys sent yields tumbling on the announcement and, over the last few weeks of the third quarter, drove rates down sharply, with the 10-year Treasury rate ending at 2.61%, down from the peak of 3.0% over the quarter (data: Dow Jones).
Markets also received a boost from the nomination withdrawal of Larry Summers, who was thought to be the hawkish frontrunner as the next chairman of the Fed. It was widely viewed that Mr. Summers could threaten the current policy of monetary accommodation, including the future path of QE. His withdrawal from the race increased the likelihood of continuity in U.S. central bank policy and a slow and gradual wind-down of QE. Political gridlock remained an overhang and a potential source of future volatility. The third quarter ended with the first partial U.S. government shutdown in 17 years after Congress failed to break a partisan deadlock by a midnight deadline. Initial market reaction was fairly calm with investment grade spreads tightening by 1-2 basis points on speculation that the duration and any associated economic effect would be limited. However, the bigger risk is that the shutdown could spill over into the much more consequential fight over raising the debt ceiling limit and avoiding the nation’s potential first-ever default. The current extraordinary measures being employed will be exhausted by mid-October.
Mergers-and-acquisitions (M&A) activity has experienced a surge recently, highlighted by the announcement that Verizon will acquire Vodafone’s 45% stake of Verizon Wireless for $130 billion. The expectation of significant supply coming to market to fund part of the deal created a technical overhang and pushed out spreads in the entire telecom/media/technology (TMT) space. According to the company statements, the $49 billion multitranche deal eventually brought to market was met with more than $100 billion in orders, proof of the continued strong demand for investment grade corporate risk. However, fund flows into investment grade have turned negative as many investors rotate into leveraged loans and equities against a rising-rate backdrop. For example, fund flows for the second quarter were -$4.0 billion, down from the prior quarter though still positive for the year.(Data: ICI.) Both supply and demand of investment grade bonds accelerated following the Fed’s dovish surprise announcement with $145 billion in supply issued in the month of September, the single largest monthly issuance since May 2008. Credit spreads on the Barclays U.S. Corporate Investment Grade Index tightened over the quarter as volatility subsided from June’s high, ending at 141 basis points over Treasurys at Sept. 30, 2013, down from 152 basis points on June 30, 2013. The index return for the period was 0.82% versus the -3.31% return for the second quarter of 2013, driven primarily by a recovery in higher-beta sectors such as subordinated bank debt and metals/mining. (Data: Barclays.)
Within the Fund
Delaware Extended Duration Bond Fund (Class A shares at net asset value) posted a negative rate of return for the third quarter of 2013 and trailed its index, the Barclays Long U.S. Corporate Index.
Attribution notes, in brief:
- The Fund’s allocation to investment grade credit was the main detractor from performance for the period, along with negative returns within emerging markets (including foreign agencies, industrials, and sovereign credits).
- Weakness in hybrid and preferred positions within the real estate investment trust (REIT) and banking sectors were the main drivers of investment grade credit underperformance.
- This was partially offset by positive security selection within the communications sector, driven by strong performance of Verizon’s recent new issuance.
- The Fund’s performance also benefited from exposure to high yield debt and convertible bonds, both of which generated strong positive returns for the quarter.
In terms of market concerns, macroeconomic risks are slightly ahead of issuer risks (shareholder and event driven risks) — not fundamental reasons. Credit spreads and their appeal should move in tandem with interest rate volatility and macroeconomic issues for the balance of the year, but we continue to believe spreads can go tighter from current levels while absolute returns, especially for investment grade credit, remain very rate-dependent. We expect the investment grade market will be subject to bouts of volatility over the near term as market participants look for cues regarding the timing of any future tapering events, the election of a new Fed chairman, debt ceiling/budget negotiations, and other idiosyncratic risks such as growth in China, M&A along with other shareholder-friendly activity, geopolitical risk, and recovery in Europe.
The Barclays U.S. Corporate Investment Grade Index is composed of U.S. dollar–denominated, investment grade, SEC-registered corporate bonds issued by industrial, utility, and financial companies. All bonds in the index have at least one year to maturity.
The views expressed represent the Manager's assessment of the Fund and market environment as of the date indicated, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Information is as of the date indicated and subject to change.
Document must be used in its entirety.
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Performance data current to the most recent month end may be obtained by calling 800 523-1918 or visiting delawareinvestments.com/performance.
Total returns may reflect waivers and/or expense reimbursements by the manager and/or distributor for some or all of the periods shown. Performance would have been lower without such waivers and reimbursements.
|Average annual total return as of quarter-end (09/30/2013)|
|YTD||1 year||3 year||5 year||10 year||Lifetime||Inception|
|Class A (NAV)||-0.54%||-6.20%||-4.05%||7.37%||14.47%||8.30%||8.34%||09/15/1998|
|Class A (at offer)||-5.08%||-10.42%||-8.41%||5.71%||13.40%||7.81%||8.01%|
|Institutional class shares||-0.48%||-6.03%||-3.82%||7.64%||14.77%||8.57%||8.61%||09/15/1998|
|Barclays Long U.S. Corporate Index||0.05%||-7.44%||-6.48%||5.36%||11.73%||6.27%||n/a|
Returns for less than one year are not annualized.
Class A shares have a maximum up-front sales charge of 4.50% and are subject to an annual distribution fee.
Barclays Long U.S. Corporate Index (view)
Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.
|Class A (Gross)||0.99%|
|Class A (Net)||0.96%|
|Institutional class shares (Gross)||0.74%|
|Institutional class shares (Net)||0.71%|
Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursement from Nov. 27, 2013 through Nov. 28, 2014. Please see the fee table in the Fund's prospectus for more information.
Institutional Class shares are only available to certain investors. See the prospectus for more information.
All third-party marks cited are the property of their respective owners.
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and its summary prospectus, which may be obtained by clicking the prospectus link located in the right-hand sidebar or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
Investing involves risk, including the possible loss of principal.
Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.
The Fund may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity, potentially forcing the Fund to reinvest that money at a lower interest rate.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.
Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.
Diversification may not protect against market risk.
The Fund may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivative transaction depends upon the counterparties’ ability to fulfill their contractual obligations.
Not FDIC Insured | No Bank Guarantee | May Lose Value