Bonds added to their year-to-date gains in the second quarter with all major sectors generating positive total returns. 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. Bonds from developed non-U.S. markets also gained, while emerging markets bonds rallied strongly as investors searched for higher yields.
The New Income Fund returned 2.18% 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 5.04% 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 5.04%, 5.41%, and 5.25% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.62% as of its fiscal year ended May 31, 2013.
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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 portfolio's strategic underweight allocation to Treasuries, which allows us greater exposure to higher-yielding credits, aided performance. An out-of-benchmark allocation to Treasury inflation protected securities provided a slight contribution as inflation readings began to turn higher. On the downside, our interest rate management detracted from results. We had reduced the portfolio's interest rate sensitivity to defend against rising rates, which worked against us as intermediate- and long-term rates declined during the quarter.
The global growth backdrop has improved recently with stronger manufacturing activity in China, new monetary stimulus from the ECB, ongoing large-scale asset purchases in Japan, and steady labor market improvement in the U.S. The Fed is on track to end its bond purchases before year-end. 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. In credit markets, spreads have continued to tighten amid exceedingly low volatility. In this environment, we expect interest rate management and security selection to play a greater role in relative performance. U.S. credit fundamentals remain solid, and our analysts continue to find select opportunities for risk-adjusted returns within their respective sectors.