Bonds added to their year-to-date gains in the second quarter, with all major sectors generating positive total returns as the market took in stride the Federal Reserve's continued tapering of its long-term asset purchases. U.S. Treasuries rallied, but credit-sensitive issues, such as corporate bonds, performed even better as investor demand easily absorbed supply. With Treasury yields declining, bonds with long maturities produced strong total returns.
The U.S. Bond Enhanced Index Fund returned 2.01% in the quarter compared with 2.04% for the Barclays U.S. Aggregate Bond Index and 2.06% for the Lipper Core Bond Funds Average. For the 12 months ended June 30, 2014, the fund returned 4.34% versus 4.37% for the Barclays U.S. Aggregate Bond Index and 4.93% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 4.34%, 4.77%, and 4.87% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.30% as of its fiscal year ended October 31, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The U.S. Bond Enhanced Index Fund charges a 0.5%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
We have been increasing a modest overweight in investment-grade corporate bonds in order to pick up additional yield, but we have concentrated purchases among shorter-dated issues in order to limit the portfolio's sensitivity to increasing yield spreads (credit spreads represent the additional yield demanded by investors over similar-maturity Treasuries). The portfolio also took profits on some Build America Bonds, a type of taxable municipal bond that has performed well and become less attractively valued. In terms of interest rate positioning, the portfolio remains underweight in intermediate-term issues, which appear most vulnerable to Fed policy normalization.
The Fed is on track to end its bond purchases before year-end, and we expect rates to trend upward, with greater volatility for short-term maturities, as the market assesses the timing and trajectory of fed funds rate hikes. Our objective will remain to closely track the performance of the Barclays U.S. Aggregate Bond Index after fees, but we will attempt to compensate for the trustee fee by seeking modest additional return, mainly through small variations in sector weightings. We will also employ what is referred to as "curve positioning" or "duration management," which is an adjustment in the mix of maturities of holdings based on our view of interest rates.