An improving global economy and a growing appetite for riskier assets led to a modest overall loss for investment-grade bonds in the first quarter. Longer-term Treasury bond prices fell and yields rose as favorable economic data lessened their perceived safe-haven appeal. Investment-grade bonds, with very low nominal yields, performed in line with the overall market and significantly lagged high yield bonds, which benefited from robust capital market activity, including record new issue volume and strong demand. Mortgage-backed securities (MBS) recorded a modest loss but outperformed the overall investment-grade market. Higher MBS yields and Federal Reserve policies may be luring some private buyers back into the market alongside the Federal Reserve. Municipals enjoyed modest gains as investors sought tax-sheltered income amid higher tax rates, and supply was constrained early in the period due to seasonal factors. Bonds from overseas markets saw steeper losses. Falling currencies relative to the U.S. dollar weighed on developed market bonds, while a rise in risk aversion hampered emerging markets.
The New Income Fund returned 0.04% in the quarter compared with −0.12% for the Barclays U.S. Aggregate Bond Index and 0.23% for the Lipper Corporate Debt Funds A-Rated Average. For the 12 months ended March 31, 2013, the fund returned 4.85% versus 3.77% for the Barclays U.S. Aggregate Bond Index and 6.00% for the Lipper Corporate Debt Funds A-Rated Average. The fund's average annual total returns were 4.85%, 6.10%, and 5.41% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.63% as of its fiscal year ended May 31, 2012.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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Benchmark Definitions
The portfolio has only a modest allocation to non-U.S. holdings, but we feel that emerging market currencies present an especially attractive opportunity to enhance returns. Emerging market economies remain favorably positioned relative to their developed market counterparts, including greater opportunity for economic growth, lower debt levels relative to GDP, and room to institute monetary and fiscal stimulus if outlooks begin to weaken. Additionally, many local currency debt issues still offer positive real yields. The potential for currency appreciation in certain markets is also attractive. We are currently targeting positions in the Polish zloty, South African rand, Romanian leu, and Mexican peso.
We believe Treasury yields will gradually move higher over the course of the year as the U.S. economy continues to improve, the eurozone crisis abates, and the Fed reduces its asset purchases. Even as an increase in U.S. interest rates appears to be getting closer, we are finding good investment opportunities in pockets of the fixed income universe. Careful research into individual securities and a global search for value will remain keystones of our investment approach.
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