TCW Core Fixed Income Fund

Quarterly Commentary


After an impressive start to the year that saw the persistence of 2017’s animal spirits, equities experienced a severe sell-off in early February as a surge in the Cboe Volatility Index (VIX) exposed lopsided risk positioning and significant retail outflows reinforced the downward trend. Volatility showed no signs of pulling back for the rest of the first quarter, and ended at approximately 22 – roughly double where it was on average over the past two years. While there was no single catalyst for the volatility spike, markets seemed to be pricing in the reality of tighter global liquidity conditions combined with a continued rate policy normalization from the Fed after positive inflation materialized in the jobs report. The hand-off of monetary control from Janet Yellen to Jerome Powell occurred in the first quarter with few hiccups, as the Fed proceeded with another 25 basis point (bp) hike at the March FOMC meeting as expected. Regarding forward expectations, the 2018 median funds rate remained unchanged at three hikes, while one additional hike was included in the 2019 and 2020 forecasts. Of note, the Fed’s long-run sustainable growth rate of the economy was unchanged at 1.8%, reflecting a certain amount of skepticism regarding the lasting effect of tax cuts. As the Fed continued to pull back, Treasury yields recalibrated, with the policy-sensitive 2-Year Treasury note overtaking the dividend yield on the S&P 500 for the first time since 2008. It is important to note that this late-cycle rising rate regime is occurring at the same time that fiscal stimulus is being implemented by way of tax reform, which has necessitated increased T-bill issuance to fund swelling deficits. This in turn puts further upward pressure on short-term funding costs, which will exacerbate already tightening liquidity conditions...

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Bloomberg Barclays U.S. Aggregate Bond Index – A market capitalization-weighted index of investment-grade, fixed-rate debt issues, including government, corporate, asset-backed and mortgage-backed securities, with maturities of at least one year.

About Securities

Securities issued by U.S. government agencies and authorities are not insured, and may not be guaranteed by the U.S. Government. Fixed income investments entail interest rate risk, the risk of issuer default, issuer credit risk, and price volatility risk. Funds investing in bonds can lose their value as interest rates rise and an investor can lose principal.

Portfolio Characteristics & Holdings
It should not be assumed that an investment in the securities listed was or will be profitable. Portfolio characteristics and holdings are subject to change at any time.

This content may include estimates, projections and other "forward-looking" statements. Actual events may differ substantially from those presented. TCW/MetWest assumes no duty to update any such statements. All projections are based on current asset prices and are subject to change.

Subject to Change

Any opinions expressed are current only as of the time made and are subject to change without notice. TCW assumes no duty to update any such statements. The views expressed herein are solely those of the author and do not represent the views of TCW as a firm or of any other portfolio manager or employee of TCW.

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