U.S. investment-grade bonds recorded modest overall gains in the quarter, thanks in large part to a decline in long-term Treasury yields. Falling oil prices took a toll on fixed income sectors with significant exposure to oil- and gas-related industries, however, including U.S. high yield bonds and emerging markets debt. Debt issued by companies in energy-related industries accounts for a large proportion of most high yield bond indexes, so the steep drop in oil prices hit the high yield asset class particularly hard. The broad investment-grade corporate bond market, which has less exposure to the energy industry, generated a healthy gain despite a rush of new supply.
The New Income Fund returned 1.24% in the quarter compared with 1.79% for the Barclays U.S. Aggregate Bond Index and 1.23% for the Lipper Core Bond Funds Average. For the 12 months ended December 31, 2014, the fund returned 5.74% versus 5.97% for the Barclays U.S. Aggregate Bond Index and 5.33% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 5.74%, 4.49%, and 4.92% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.63% as of its fiscal year ended May 31, 2014.
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While the outlook has worsened for some energy issuers, the pullback has weighed unfairly, in our opinion, on many high yield issuers that our analysts still believe offer long-term opportunities. Indeed, the selling made valuations in the asset class more attractive. Our out-of-benchmark allocation to Treasury inflation protected securities (TIPS) detracted from performance as falling energy prices, a stronger dollar, and global economic concerns all weighed heavily on the headline measure of U.S. inflation.
While the Fed appears highly likely to begin raising interest rates in 2015, we believe any resulting interest rate volatility will likely be concentrated in shorter maturities. Longer-term interest rate increases may remain tempered by lower global growth, falling energy prices, and the attractive yields on U.S. Treasuries relative to the sovereign debt of other countries still engaged in monetary policy easing. It seems likely that Fed action will cause investors to favor higher-quality bonds, which is one reason we have been focusing on higher-rated investment-grade corporate issues.