MARCH 2016
View from the
Bond Desk
page 1
Steps Ahead of a Looming
Liquidity Challenge
By Nicholos Venditti, Portfolio Manager
page 4
Bond Correlations and Interest Rates,
Not Always a Straight Line
By Josh Yafa, Client Portfolio Manager
On the Municipal Market:
Steps Ahead of a
Looming Liquidity Challenge
Nicholos Venditti | Portfolio Manager and Managing Director
Not always the talk of the town, liquidity
in the fixed income market still looms as a
detrimental risk. It could easily and quickly
take center stage, however, given the right
mix of economic scenarios and circumstances.
Here’s a look at how the liquidity landscape
arrived at where it is, and why we believe
Thornburg’s ability to think a little differently
in this space is helping to protect and prepare
for a potential crisis.
A Quick Look Back
perately desired. The income component of
total return remained elusive, while price
appreciation seemed endless. Income availability aside, they were good times for fixed
income investors and municipal investors
in particular. Rates kept moving lower, an
actual rate hike was years away, the Puerto
Rico credit story was still months from
spilling itself and there were 10 buyers
for every seller. Times couldn’t have been
better. That is, until the fateful day when
Federal Reserve Chairman Ben Bernanke
mentioned tapering.
Let’s take a trip back to early 2013. Much
like today, fixed income investors were
struggling to find the income they so des-
All of a sudden rates shot up from a low
of 1.63% in early May to 2.61% in late
June and to over 3% by year end. Fixed
income investors, who had been waiting
for the dream to end for some time, began
to flee the space the very minute the Fed
began discussing the slow end of quantitative easing.
Following the initial tapering discussion,
the fixed income markets started to freeze
as the universe tried to wrap its mind
around Bernanke’s statements. For the
first time in a long while there were no
longer 10 buyers for every seller. In fact,
more often than not, there were no buyers at all. Luckily, the market sorted itself
out, at least from a liquidity perspective,
and the phenomena lasted only for three
or four days.
1
LIQUIDITY CHALLENGE
Figure 1 | Could Market Withstand Herd’s Flight from Corporates?
In their reach for yield since 2008, far more retail investors chose corporate bonds (over municipals, agencies/government
issues, etc.). If herd mentality holds true, a major market disruption could create an unprecedented liquidity crisis if everyone
sells at once.
Treasury
30%
Agency & GSE
Municipals
Corporate and Foreign Loans
% Market Share
25%
20%
15%
10%
5%
2015 Q3
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0%
Source: Federal Reserve, Financial Accounts of the United States, December 10, 2015.
GSE = Government Sponsored Enterprises
At the end of 2013, most analysts and
pundits were forecasting Armageddon for
the fixed income market in 2014. When
predictions failed to play out, the collective memory of market participants began
to fade. While most remember the rise in
rates associated with the 2013 “taper tantrum,” few remember that for three days in
June the biggest risk that faced the market
was a lack of liquidity.
The Current State
Today, the municipal market feels a lot like
early 2013. Bond investors are still struggling to find income, but price appreciation
is strong, as rates rallied to 1.66% despite
the much-anticipated Fed tightening in
December. Credit spreads are tight, and
although the market is still inundated with
Puerto Rico news, general credit appears
to be improving. Money is flowing into the
municipal market and—like 2013—there
are 10 buyers for every seller.
All that said, is the greatest threat facing
the market today a lack of liquidity? If yes,
what should an investor do?
2
Liquidity risk in the fixed income markets
has been exacerbated by several factors,
perhaps most notably are government regulations. In the past, investment banks
would typically act as liquidity providers
during market disruptions. By acting as
the “buyers of last resort,” banks helped
mitigate downside pricing risk for portfolios that needed to raise cash to meet
redemptions. Government regulations have
effectively reduced the size of the balance
sheet of those financial institutions. If we
see another liquidity event, banks may be
unable, or unwilling, to step in to help stabilize the market.
In addition to reducing financial capital
dedicated to the fixed income markets,
big banks are starting to reduce human
capital as well. Low rates have driven
down profitability of fixed income trading
desks, leading many of the major players to
severely reduce headcount. So, as margins
shrink and banks cut staff on their fixed
income trade desks, can they adequately
respond to a massive run for the exits?
Moreover, the landscape of fixed income
investing has changed since the financial
crisis of 2008 (see shaded area in F igure
1). The municipal market has always been
heavily influenced by the retail investor.
Recently, retail ownership in the corporate
market has ticked up. Figure 1 uses mutual
fund ownership, closed end fund ownership
and exchange traded fund ownership as a
proxy for measuring retail investment.
Why is this a new potential threat to
liquidity? Retail investors tend to act in
tandem and usually overreact to market
disruptions. Any disturbance in the fixed
income markets could cause retail owners
to hit the sell button at the same time. At
that point, banks will be forced to make a
relative value decision between corporates
and municipals when determining which
securities to add to their balance sheets.
Such structural changes to the fixed
income markets pose a threat to fixed
income investors, but they aren’t alone in
driving liquidity risk. Investor behavior
has created problems, too. The prolonged
low interest rate environment has created
disconnect between the risk tolerance of
individual investors and the risks they are
currently taking in their portfolios. The
LIQUIDITY CHALLENGE
Widespread credit deterioration, or any other catalyst
that causes a wide rotation out of fixed income
products, could be devastating for any portfolio that
needs to sell bonds to meet cash needs.
demand for yield has driven investors and
portfolio managers further out on the risk
spectrum, aggressively seeking more and
more income.
ment teams have been making a concerted
effort to help protect our portfolios from
another such event.
No case study makes this fact clearer
than the Third Avenue Focused Credit
Fund. The fund’s investors and portfolio
managers, hungry for income, took on
excessive risk in the process. Worse than
that, the portfolio added the risk by buying ever more pricey credits. As they all
chased the high yield space, the lower
their yields became (while spreads tightened). Essentially, they were investing in
the “worst of the worst” at historically high
prices. So, when credit spreads in the corporate market started to widen and fund
performance suffered, investors demanded
their money back, en masse. Liquidity, or
lack thereof, suddenly (but not surprisingly)
became more important than everything
else, not only to redeeming investors, but
to the perpetuity of the fund itself.
Durations Down, Quality Up
A Look Ahead
The Third Avenue debacle brought the
discussion of liquidity back to the forefront after its long hiatus. It is important
for investors to recognize that while Third
Avenue is somewhat unique given their
high-risk-investment approach, a similar event could impact the broader fixed
income markets with the right macroeconomic circumstances. An increase in
rates, widespread credit deterioration, or
any other catalyst that causes a wide rotation out of fixed income products, could be
devastating for any portfolio that needs to
sell bonds to meet cash needs.
While it is impossible to entirely insulate
a portfolio from liquidity risk, Thornburg’s
global fixed income and municipal invest-
The market has not been compensating
investors to take risk. Credit spreads, particularly in the municipal market, have
remained incredibly tight. Absolute rates
are extremely low and the slope of the
yield curve has not been enticing enough to
take excess duration risk. As such, we have
shortened the durations of most Thornburg
fixed income portfolios. In this environment, we believe adding “worst of worst”
credits when they’re at their most expensive
ever is a fool’s errand.
Given the excessive costs of taking on more
credit risk, Thornburg has been taking it
off the table, investing in carefully selected
higher-grade credits. This has increased
the average credit quality of the portfolio
line-up. The ability to focus on credit quality is imbued by our disciplined portfolio
construction process centered on fundamental, individual s­ ecurity selection. We
are guided by this in any environment, but
it is especially beneficial to reduce overall
credit risk exposure right now.
Far from invigorating, these portfolio
management decisions nevertheless are
effective, necessary, and make total sense
from a risk/reward standpoint. That is, the
steps are beneficially creating portfolio
characteristics traditionally associated with
higher liquidity credits, which are typically
higher-rated bonds and bonds with strong
legal securities.
A derived benefit of our selective de-­
risking is higher-than-average cash and
reserve positions across our fixed income
portfolios. This way, we’re structured to
meet redemptions that may arise with cash,
rather than proceeds from “fire sale” bond
trading. We believe shareholders are best
served when their fund is positioned to be
a provider of liquidity when needed it’s
needed the most, rather than the victims
of a lack of it if a crisis hits.
Not Led by the Fed
Positioning on the yield curve has also
been a driver of liquidity, because investors may be reluctant to buy longer-dated
bonds if they perceive an increase in rates
or a steepening of the yield curve. That’s
why we manage our core portfolios to a
laddered structure. At its core, active laddering provides a constant source of cash
flows as bonds mature each year. Therefore,
liquidity in the portfolio is naturally
boosted by our active laddered approach
to fixed income.
Generally, laddering involves investing
in bonds at staggered maturities so that a
portion of the portfolio will always mature
each year. As bonds mature, they generate
cash to be reinvested or used to meet shareholder liquidity needs. Money in, money
out, money in. Repeat.
The Thornburg fixed income team manages
with one core philosophy: get rewarded if
you’re going to take risk. Liquidity risk
is no different. It may be getting more
headlines lately, but liquidity has always
been one of the risks for which we have
demanded compensation since we started
running fixed income funds in 1984.
Liquidity risk isn’t always as riveting as
debates over troubled credits or potential
macroeconomic risks, but we always held
that the ramifications of a liquidity event
could be every bit as painful.
We believe our focus on quality credit
research and our actively managed
approach to laddering and other fixed
income strategies will provide us with
the foundation and flexibility to not just
weather a liquidity storm but to exploit
market dislocations for the benefit of
our shareholders. n
3
Bond Correlations and Interest Rates,
Not Always a Straight Line
Josh Yafa | Client Portfolio Manager
When discussing investing, a standard rule
applies: bring up bond correlations if your
audience needs a nap. That axiom, however,
suddenly becomes less tiresome when investors begin to worry about rising interest
rates. Not surprisingly, the thought of losing
significant principal from bonds—an inexplicable combination of terms for investors
accustomed to fixed income’s ballast—tends
to pique the attention of even the most seasoned and skeptical. Unfortunately, the
popular wisdom regarding interest rate risk,
or duration, tends to be oversimplified and
ultimately misleading.
increase by 1.5%, it should cause the portfolio to decrease in value by approximately
-4.5% (when yields increase bond prices
decrease, and vice versa).
Challenging the
Duration Paradigm
Interest rate risk, as described by the previous example, is often the only risk investors
consider when buying U.S. Treasuries. The
reason for this is that U.S. Treasuries have
long been considered the world’s risk-free
investment. Broach the subject of credit
risk with respect to U.S. Treasuries and
the response usually sounds something
like “if the U.S. Treasury defaults we have
much bigger problems to worry about.”
Probably true, but we will leave that topic
for another time.
Bond fund investors are taught that in
order to calculate their portfolio’s potential price sensitivity to a change in bond
yields, you only need to multiply the portfolio’s duration by the expected change in
yield. Note that it is the change in U.S.
Treasury yields (i.e., risk-free rates) not
the change in the Federal Funds policy
rate, that ultimately matters when calculating duration. While U.S. Treasury
yields and Fed rates are highly correlated,
they do not move one-for-one. So, if a
hypothetical portfolio has a duration of
3.0 years and bond yields are expected to
This back of the envelope equation, however, misses two central themes: one, the
“yields” in that scenario are U.S. Treasury
yields and two, not all bonds are intrinsically linked to the same interest-rate risk
inherent in U.S. Treasuries. Simply stated,
bonds are generally exposed to multiple
forms of risk at any given time, which can
largely be broken down along the lines of
interest rate risk or credit risk.
Meantime, corporate bonds, asset-backed
securities, foreign sovereigns, etc., are all
subject to a broad definition of credit risk.
Here we review “credit risk” as essentially
We take the view that relative value and
diversification are paramount to creating the best
outcomes for investors.
4
all risks not encompassed by the change
in risk-free rates. It is not uncommon to
hear of corporations going bankrupt, individuals defaulting on their mortgages, or
foreign governments missing interest payment obligations. Therefore, investors in
the everything-but-U.S. Treasuries camp
consider multiple dimensions of risk when
assessing opportunities. Moreover, within
the catch-all of credit risk there are many
nuanced varieties of factor exposure that
can affect each company, consumer, or government differently.
Fixed Income Needs a Wide Lens
At Thornburg Investment Management,
we take the view that relative value and
diversification are paramount to creating the best outcomes for investors.
Depending upon the mandate, we consistently attempt to diversify the sources
of potential risk and return so that performance is not entirely predicated upon
a singular event, outcome, or factor exposure. To that end, our investment team
is comprised of portfolio managers and
analysts with deep backgrounds in specific
asset classes, but with a flexible perspective. The team structure helps ensure that
each investment professional is aware of
relative valuations and opportunities
across the entire fixed income landscape,
not just their preferred habitat. It is with
this basis of understanding that portfolio managers and analysts can constantly
assess and trade off various types of risk
and return for one another. Within this
philosophy of balancing risks, our fixed
income strategies often temper their
interest-­rate exposure through the introduction of other opportunities.
BOND CORRELATIONS
Table 1 | Duration Not Always a Telling Sign of Interest Rate Risk
Fixed income investors often swear by duration to gauge, even predict, interest
rate risk. Duration isn’t always the best measure, however, and can be misleading.
A snapshot of three Thornburg strategies—all with relatively close average effective durations—shows that the more diversified the mandate, the lower the actual
exhibited duration and, as importantly, correlation to risk-free rates (3-Year Treasury).
Avg. Effective
Duration (yrs)
Avg. Exhibited
Duration (yrs)
R2
(vs. risk-free rates)
Thornburg Limited Term
U.S. Government Fund
2.53
2.31
0.81
Thornburg Limited
Term Income Fund
3.00
2.48
0.62
Thornburg Strategic
Income Fund
3.21
0.70
0.14
Strategy
Data as of 12/31/2015.
The simple statistic of “duration” may not
adequately encapsulate the interest-rate risk of our
fixed income strategies.
Finding Value Even When
Rates Increase
In essence, during periods when U.S.
Treasury yields increase it is often in sympathy with improving economic conditions.
This dynamic is frequently beneficial for
corporations and by extension corporate
bonds, which benefit as the broader economy improves. This can cause the average
credit profile of a corporation to improve as
its underlying business fundamentals catch
the economic tailwind. Thus, even though
U.S. Treasury yields are increasing, which
theoretically should cause duration-related
losses to corporate bonds, it is often the
case that duration losses are partially offset
by credit-related bond price improvements.
As a result of this dynamic, and where
allowed by the specifics of each Thornburg
fixed income mandate, the simple statistic
of “duration” may not adequately encapsulate the interest-rate risk of our fixed
income strategies.
Shown in Table 1 are the average effective durations from 2014-2015 of three
Thornburg fixed income strategies compared with their exhibited durations over
the same time period. We compare the
effective durations, as produced by a mathematical formula, to the actual (exhibited)
behavior shown by each strategy. To
arrive at exhibited durations, we compared monthly changes in the yield of the
3-year U.S. Treasury with the price return
of each strategy. The 3-year U.S. Treasury
was chosen because it most closely matches
the average cash flows of the three strategies (i.e., the durations were similar).
The data shows that the broader the
mandate and exposure to additional
fixed income asset classes, the lower the
actual correlation to U.S. Treasury rates.
Furthermore, their respective R 2 metric
shows the percentage of each strategy’s
return that can be explained by the movement of risk-free rates. Again, as a strategy
incorporates additional vectors of risk and
return the explanatory power of risk-free
rate movement decreases, from highly
meaningful for Thornburg Limited Term
U.S. Government Fund (81%) to poten-
Thornburg Limited Term U.S.
­Government Fund Portfolio
­Composition, 12/31/2015
Mortgage Pass Through
20.6%
Treasury
19.7%
Collateralized Mortgage Obligations
17.6%
Government Agency
11.9%
Commercial Mortgage-Backed Securities
10.1%
Asset-Backed Securities
7.5%
Cash & Cash Equivalents
12.6%
Thornburg Limited Term Income Fund
Portfolio Composition, 12/31/2015
Corporate Bonds
52.1%
Asset-Backed Securities
18.5%
Commercial Mortgage-Backed Securities
5.4%
Agency
4.4%
Municipal Bonds
3.8%
Collateralized Mortgage Obligations
2.3%
Treasury
1.9%
Mortgage Pass Through
1.8%
Bank Loan
0.3%
Cash & Cash Equivalents
9.5%
tially insignificant for Thornburg Strategic
Income Fund (14%).
Deconstructing Duration: Inside
Three Mandates
T hor nbu rg Lim ited Ter m U. S .
Government Fund is as it sounds—a
strategy that will buy and hold only
U.S. Government-backed securities.
Thus, one could expect the strategy to
exhibit sensitivity to yield rate changes
on U.S. government securities (i.e., U.S.
Treasuries). The strategy has some flexibility to vary risk exposures using a variety
of U.S. government s­ ecurities apart from
Treasuries, and does so with an eye towards
capturing additional relative value. These
include looking to U.S. Agency-backed
mortgages and U.S. Agency bonds. Within
the context of this mandate, we have made
a decision to keep duration relatively
low given our view that the risk-reward
5
BOND CORRELATIONS
dynamic has not been attractive in terms
of holding longer-­dated maturities.
Government Fund’s mandate by adding
investment-grade corporates, asset- and
mortgage-backed securities, commercial
mortgage-backed securities, etc. The introduction of these additional fixed income
asset classes lowers the strategy’s correlation to U.S. Treasury yields and reflects our
view that greater value has been present in
corporate and asset-backed markets relative
to U.S. government-backed securities. Over
the recent past, U.S. government-backed
securities have played a very small part in
this portfolio’s asset allocation. Currently,
the marginal added relative value has been
sought in the asset-backed securities segment, given its sensitivity to improving
consumer credit metrics.
Moving further out on the credit risk spectrum, Thornburg Limited Term Income
Fund is an investment-grade core bond
strategy with the majority of the portfolio
(nearly 60%) A rated or better. The strategy can purchase a broader array of U.S.
dollar denominated securities, expanding upon Thornburg Limited Term U.S.
Thornburg Strategic Income Fund
Portfolio Composition, 12/31/2015
Corporate Bonds
63.6%
Asset-Backed Securities
12.3%
Bank Loans
8.2%
Treasury Foreign
2.8%
Preferred Equity
1.7%
Collateralized Mortgage Obligations
1.2%
Commercial Mortgage-Backed ­Securities
0.8%
Common Equity
0.7%
Muni Bonds
0.5%
Agency
0.4%
Cash & Cash Equivalents
7.6%
Finally, Thornburg Strategic Income
Fund allows for the greatest flexibility
of the three shown strategies. The strategy can span the quality spectrum with
respect to investment-grade or high-yield
credit across a variety of sub-asset classes.
Additionally, it can also invest in non-U.S.
dollar denominated securities. As could
be expected, the inclusion of additional
vectors of risk and return further dampen
the strategy’s sensitivity to U.S. Treasury
yields. Thornburg Strategic Income Fund
exhibited very little correlation to U.S.
Treasury yields during 2014-2015, due in
large part to the investment team’s search
for superior relative value in corporate
credit, ABS, and bank loans. Given this
strategy’s diverse asset allocation, the
explanatory value of risk-free rates with
respect to return is likely to remain the
lowest of the three strategies outlined.
Mindful of Risk, Committed
to Value
While managing fixed income strategies
on behalf of clients, we attempt to avoid
marrying portfolios to any singular exposure that would encompass a singular risk,
be it in the form of duration or credit. The
degree to which these exposures are diversified depends largely upon the guidelines
provided by each of the three mandates.
Yet, in all circumstances, the Thornburg
global fixed income investment team operates with the philosophy that constantly
searching for relative value and diversification can lead to the best possible
combination of outcomes. n
Active Fixed Income Offerings from Thornburg
Municipal Bond Funds
Global Fixed Income Funds
Low Duration Municipal Fund
Low Duration Income Fund
A shares: TLMAX
A shares: TLDAX
I shares: TLMIX
Limited Term Municipal Fund
A shares: LTMFX
C shares: LTMCX
Limited Term U.S. Government Fund
I shares: LTMIX
A shares: LTUSX
R3 shares: LTURX
I shares: THMIX
Limited Term Income Fund
Intermediate Municipal Fund
A shares: THIMX
C shares: THMCX
Strategic Municipal Income Fund
A shares: TSSAX
C shares: TSSCX
I shares: TSSIX
California Limited Term Municipal Fund
A shares: LTCAX
C shares: LTCCX
I shares: LTCIX
New Mexico Intermediate Municipal Fund
A shares: THNMX
D shares: THNDX
I shares: THNIX
New York Intermediate Municipal Fund
A shares: THNYX
6
I shares: TNYIX
I shares: TLDIX
A shares: THIFX
R3 shares: THIRX
C shares: LTUCX
R4 shares: LTUGX
C shares: THICX
R4 shares: THRIX
I shares: LTUIX
R5 shares: LTGRX
I shares: THIIX
R5 shares: THRRX
Strategic Income Fund
A shares: TSIAX
R3 shares: TSIRX
C shares: TSICX
R4 shares: TSRIX
I shares: TSIIX
R5 shares: TSRRX
Important Information
The views expressed by the portfolio managers reflect their professional opinions and are
subject to change.
Yield Curve – A line that plots the interest rates, at a set point in time, of bonds having
equal credit quality, but differing maturity dates.
Investments in the Funds carry risks, including possible loss of principal. Funds investing in
bonds have the same interest rate, inflation, and credit risks that are associated with the
underlying bonds. The principal value of bonds will fluctuate relative to changes in interest
rates, decreasing when interest rates rise. This effect is more pronounced for longer-term
bonds. Unlike bonds, bond funds have ongoing fees and expenses. Investments in mortgage backed securities (MBS) may bear additional risk. Investments in lower rated and unrated bonds may be more sensitive to default, downgrades, and market volatility; these investments may also be less liquid than higher rated bonds. Investments in derivatives are
subject to the risks associated with the securities or other assets underlying the pool of securities, including illiquidity and difficulty in valuation. Investments in equity securities are
subject to additional risks, such as greater market fluctuations. Special risks may be associated with investments outside the United States, especially in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks. Investments
in the Funds are not FDIC insured, nor are they deposits of or guaranteed by a bank or any
other entity.
Treasuries – U.S. Treasury securities, such as bills, notes and bonds, are negotiable debt
obligations of the U.S. government. These debt obligations are backed by the “full faith and
credit” of the government and issued at various schedules and maturities. Income from
Treasury securities is exempt from state and local, but not federal, taxes.
Any securities, sectors, or countries mentioned are for illustration purposes only. Holdings
are subject to change. Under no circumstances does the information contained within represent a recommendation to buy or sell any security.
Collateralized Mortgage Obligation (CMO) – A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying
maturities, called tranches. The repayments from the pool of pass-through securities are
used to retire the bonds in the order specified by the bonds’ prospectus.
Income earned from municipal bonds is exempt from regular federal and in some cases,
state and local income tax. Income may be subject to the alternative minimum tax (AMT).
There is no guarantee that the Funds will meet their investment objectives.
Diversification does not assure or guarantee better performance and cannot eliminate the
risk of investment losses.
High yield bonds may offer higher yields in return for more risk exposure.
A bond credit rating assesses the financial ability of a debt issuer to make timely payments
of principal and interest. Ratings of AAA (the highest), AA, A, and BBB are investment-­
grade quality. Ratings of BB, B, CCC, CC, C and D (the lowest) are considered below
investment-­grade, speculative grade, or junk bonds.
Credit quality ratings for Thornburg’s global fixed income portfolios used ratings from
Moody’s Investors Service. Where Moody’s ratings are not available, we have used
Standard & Poor’s ratings. Where neither rating is available, we have used ratings from
other rating agencies. “NR” = not rated.
Class R shares are limited to retirement platforms only. Class I shares may not be available
to all investors. Minimum investments for the I share class may be higher than those for
other classes.
Laddering involves building a portfolio of bonds with staggered maturities so that a portion
matures each year. Money that comes in from maturing bonds is typically invested in bonds
with longer maturities at the far end of the portfolio.
Agency bond – A debt obligation issued by government corporations or government sponsored enterprises. They are exempt from state and local taxes and are not guaranteed by
the U.S. government.
Asset-backed Security (ABS) – A security whose value and income payments are derived
from and collateralized (or “backed”) by a specified pool of underlying assets. The pool of
assets is typically a group of small and illiquid assets that are unable to be sold individually.
Pooling the assets into financial instruments allows them to be sold to general investors, a
process called securitization, and allows the risk of investing in the underlying assets to be
diversified because each security will represent a fraction of the total value of the diverse
pool of u­ nderlying assets.
Effective Duration – A bond’s sensitivity to interest rates, incorporating the embedded option features, such as call provisions. Bonds with longer durations experience greater price
volatility than bonds with shorter durations.
Mortgage-backed Security – A type of asset-backed security that is secured by a mortgage
or collection of mortgages. These securities must be grouped in one of the top two ratings
as determined by a accredited credit rating agency and usually pay periodic payments that
are similar to coupon payments. The mortgage must have originated from a regulated and
authorized financial institution.
Mortgage Pass-Through – A security consisting of a pool of residential mortgage loans.
Payments of principal, interest and prepayments are “passed through” to investors each
month.
Riskless (or risk-free) Interest Rate – The theoretical rate of return of an investment with
zero risk. The risk-free rate represents the interest that an investor would expect from an
absolutely risk-free investment over a given period of time. Though a truly risk-free asset
exists only in theory, in practice most professionals and academics use short-dated government bonds, such as a three-month U.S. Treasury bill.
R Squared (R 2) – A statistical measure that represents the percentage of a fund’s or security’s movements that are explained by movements in a benchmark index.
Sovereign debt – Government debt that has been issued in a foreign currency.
The laddering strategy does not assure or guarantee better performance than a non-laddered portfolio and cannot eliminate the risk of investment losses.
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit thornburg.com. Read them
carefully before investing.
Thornburg Funds are distributed by Thornburg Securities Corporation.
7
2300 North Ridgetop Road
Santa Fe, New Mexico 87506
thornburg.com
877.215.1330
To learn more about Thornburg’s active fixed income line up,
visit www.thornburg.com/fixedincome
View from the
Bond Desk
page 1
Steps Ahead of a Looming
Liquidity Challenge
By Nicholos Venditti, Portfolio Manager
page 4
Bond Correlations and Interest Rates,
Not Always a Straight Line
By Josh Yafa, Client Portfolio Manager
3/2/16
© 2015 Thornburg Investment Management, Inc.
TH3565