The portfolio's overall duration was increased over the quarter driven in part by adding to high-quality countries, such as the U.S. and Australia. We also reduced the underweight duration position in the eurozone and moved the UK up to neutral. The changes reflected our expectations that slowing global growth, geopolitics, and trade tensions could fuel a flight into high-quality government bonds.

Country/duration positioning

• Within developed markets, we began increasing the overweight duration position in the U.S. around mid-October. This was driven by expectations for growth to moderate and the Federal Reserve to slow the pace of interest rate hikes in 2019. Overall, our bias for a flattening of the Treasury yield curve stayed in place as inflation remained well behaved. In the eurozone, we added to Germany in the 7- to 10-year part of the curve and moved Italy back to neutral as budget concerns eased. The overall underweight duration position was reduced as economic growth continued to slow. Over the medium-term, we believe eurozone government bonds are potentially vulnerable as the markets have yet to price in the European Central Bank taking a key step toward monetary policy normalization at the end of 2018 when its quantitative easing program finished.
• Among other developed market moves, we opened a new overweight duration position in Australia on anticipation that the central bank will keep interest rates unchanged for the foreseeable future, a factor we believe should be supportive for bonds. Meanwhile, in the UK, we closed the underweight duration position in mid-November on uncertainty surrounding the country's exit from the European Union. Toward the end of the period, we opened a new underweight duration position in Canada as we felt that the market was being too pessimistic on the outlook for interest rate hikes.
• Our allocation to local emerging market bonds remained low during the quarter. In terms of moves, we reduced overweight positions in Mexico and Thailand and took profit on the off-benchmark position in Brazil. We also added modestly to our off-benchmark exposure in domestic Romania on anticipation that inflation pressures could recede. Throughout, we maintained overweight positions in Chile, and off-benchmark exposures in India and South Africa. To balance some of the risks, we maintain a negative bias in Eastern Europe through underweight duration positions expressed in Hungary and Poland.

Currency selection

• On the currency front, we shifted to an underweight position in the U.S. dollar toward the end of the quarter. This was driven in part by adding to the overweight position in the Swiss franc and opening a new overweight position in the Swedish krona after the central bank raised interest rates for the first time since 2011 in December. Overall, we felt that with U.S. growth slowing and the Fed potentially delivering fewer hikes in 2019, the dollar could be vulnerable to a correction. In other moves, underweight positions in the euro and Australian dollar were closed. Throughout, we maintained an overweight position in the Japanese yen and underweight allocations to the Singapore dollar and Taiwanese dollar.
• In emerging markets, we added tentatively to a select number of currencies. This included the Mexican peso, the Argentine peso, the South African rand, and the Malaysian ringgit. These complemented existing exposures in the Romania leu and the Colombian peso. The overweight position in the Czech koruna was closed.

Sector allocation and security selection

• We maintain an allocation to hard currency emerging market sovereign debt as the income stream remains attractive. We also hold modest exposure to European high yield bonds.
• To reduce portfolio risk, we continue to hold defensive positions in credit markets. The majority of this is expressed through short credit default swap positions in a U.S. investment-grade bond index. In emerging markets, except for Mexico, we closed the credit default swap positions at an individual country level in Turkey, South Africa, and Indonesia.