Domestic bonds produced good returns in the second quarter of 2016. Intermediate- and long-term bond prices rose and interest rates declined as the Federal Reserve refrained from raising short-term rates because of mixed U.S. economic data. A late-quarter safety bid following the UK referendum also helped Treasuries. In the investment-grade universe, long-term Treasuries performed best, but corporate bonds also did well. Mortgage- and asset-backed securities generated mild gains. Tax-free municipal bonds fared slightly better than the taxable bond market, helped by strong demand and limited supply. High yield bonds decisively surpassed high-quality securities, as credit spreads narrowed and energy and metals and mining issues rallied with commodity prices. Bonds in developed non-U.S. markets produced good returns in U.S. dollar terms-despite European currency weakness versus the greenback-amid expectations that global growth would slow as Brexit-related uncertainty lingers.
The New Income Fund returned 2.42% in the quarter compared with 2.21% for the Barclays U.S. Aggregate Bond Index and 2.32% for the Lipper Core Bond Funds Average. For the 12 months ended June 30, 2016, the fund returned 5.42% versus 6.00% for the Barclays U.S. Aggregate Bond Index and 4.95% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 5.42%, 3.67%, and 5.29% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.60% as of its fiscal year ended May 31, 2015.
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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.
We reduced our risk exposure during the quarter as markets were facing myriad macroeconomic concerns, including the possible of further Fed hikes, the uncertainty surrounding the Brexit referendum and China's ability to control its slowing growth, and low oil prices. Our corporate credit analysts also believe that we are fairly late in the credit cycle, leading us to be cautious.
We expect the Fed to remain on hold at least until December. Still, we believe that the eventual resumption of rate hikes will apply upward pressure on yields, particularly on shorter-term securities. Meanwhile, longer-term yields continue to be influenced by macroeconomic events. Any change in expectations for a rate hike this year has the potential to fuel market volatility.