U.S. investment-grade bond returns were mixed in the fourth quarter as longer-term interest rates increased. The 10-year Treasury note yield rose to 3.03% by the end of December- the highest level in about two-and-a-half years- as economic data were generally strong and the Fed prepared to reduce its asset purchases. In the investment-grade universe, long-term Treasuries posted moderate losses, while agency mortgage-backed securities fell to a lesser extent. Asset-backed and municipal securities were mostly flat, but corporate bonds edged higher. High yield bonds decisively outperformed high-quality issues for the quarter and for the year.
The New Income Fund returned 0.29% in the quarter compared with −0.14% for the Barclays U.S. Aggregate Bond Index and 0.22% for the Lipper Core Bond Funds Average. For the 12 months ended December 31, 2013, the fund returned −2.26% versus −2.02% for the Barclays U.S. Aggregate Bond Index and −1.87% for the Lipper Core Bond Funds Average. The fund's average annual total returns were −2.26%, 5.76%, and 4.80% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.62% as of its fiscal year ended May 31, 2013.
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The portfolio has a modest allocation to bonds not included in the benchmark, including high yield bonds and leveraged loans. High yield performed well in the period as investors continued to search for yield amid an improving economic environment, which has led to healthy corporate cash flows and sound fundamentals. Leveraged loans have also seen consistent demand from investors attracted by their floating rate feature and solid fundamentals. We also maintain non-benchmark positions in foreign currencies, which detracted for the quarter. Our position in the Brazilian real weighed on performance as investors remained concerned about slowing growth and elevated inflation in the country.
Fixed income markets appear to have reached an inflection point early last year, and it appears unlikely that bond investors will enjoy a broad pattern of falling yields and rising bond prices again soon. Nevertheless, we still believe that bonds deserve a place in most investors' portfolios. The recent upward adjustment to longer-term bond yields has been substantial, and valuations are much more reasonable in light of the persistence of low inflation.