Relatively upbeat news about the global economy and a growing appetite for riskier assets led to a modest overall loss for investment-grade bonds in the first quarter. Longer-term Treasury bond prices fell and yields rose as favorable economic data lessened their appeal as a perceived safe haven. Investment-grade bonds, with very low nominal yields, performed in line with the overall market and significantly lagged high yield bonds, which benefited from robust capital markets activity, including record new issue volume and strong demand for high yield debt despite historically low yields. Mortgage-backed securities (MBS) recorded a modest loss but performed a bit better than the overall investment-grade market. Higher MBS yields appear to be starting to lure some private buyers back into the market alongside the Federal Reserve. Bonds from overseas markets saw steeper losses. Falling currencies relative to the U.S. dollar weighed on bonds from developed markets, while a rise in risk aversion hampered emerging markets debt.
The Spectrum Income Fund returned 1.63% in the quarter compared with −0.12% for the Barclays U.S. Aggregate Bond Index and 1.16% for the Lipper Multi-Sector Income Funds Average. For the 12 months ended March 31, 2013, the fund returned 7.67% versus 3.77% for the Barclays U.S. Aggregate Bond Index and 8.29% for the Lipper Multi-Sector Income Funds Average. The fund's average annual total returns were 7.67%, 6.83%, and 7.13% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.69% as of its fiscal year ended December 31, 2011.
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Benchmark Definitions
Holdings in diversifying sectors such as dividend-paying stocks and high yield bonds drove most of the fund's performance. Security selection in the underlying funds also lifted relative returns, particularly in the High Yield, Emerging Markets Bond, and New Income Funds, each of which exceeded its respective benchmark. The fund's inclusion of stocks proved helpful as stock returns outpaced bond returns for the quarter. Our underweight to long-term Treasuries also proved helpful as yields increased from historically low levels, pushing down Treasury prices. Our current strategy favors high yield over U.S. investment-grade bonds. High yield interest rates have fallen to low levels in absolute terms, and the deal terms in some recent issues have become less favorable to investors. Nevertheless, high yield bonds remain attractive to other fixed income sectors in a low-yield environment, particularly given prospects for a slowly improving economy.
Our global growth expectations remain modest for the next several quarters. The housing recovery, moderate job growth, and an uptick in personal income growth are supporting gradual improvement in the U.S. economy, but the ongoing fiscal policy debate and its effect on growth remains uncertain. Much of Europe continues to struggle with austerity and recession. The Cyprus bank rescue highlights the continuing challenges in the eurozone debt crisis and the market's susceptibility to them. On the positive side, U.S. corporate balance sheets and profit margins remain healthy, and earnings and revenue growth are consistent with modest economic growth. China's economic growth has slowed from higher levels, but signs of improving data have materialized. We expect the broad diversification of the fund combined with T. Rowe Price's emphasis on fundamental research will benefit long-term performance in a wide range of economic environments.
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