Bond returns were mixed in the quarter. Long-term Treasury interest rates declined to their lowest levels in more than one year but rose above their late-August lows in September. Short- and intermediate-term Treasury note yields increased as investors began to anticipate the onset of Federal Reserve rate hikes. High yield bonds declined, underperforming investment-grade issues, as credit spreads widened in response to some risk aversion and weaker demand in the face of strong issuance. Long-term Treasuries did well, but agency mortgage-backed, asset-backed, and corporate securities were mostly flat. Bonds in developed non-U.S. markets fell moderately in dollar terms, hurt by a stronger dollar versus the yen, euro, and British pound. Emerging markets bonds declined but held up somewhat better than bonds in developed markets.
The New Income Fund returned 0.10% in the quarter compared with 0.17% for the Barclays U.S. Aggregate Bond Index and −0.07% for the Lipper Core Bond Funds Average. For the 12 months ended September 30, 2014, the fund returned 4.75% versus 3.96% for the Barclays U.S. Aggregate Bond Index and 4.32% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 4.75%, 4.44%, and 4.93% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.63% as of its fiscal year ended May 31, 2014.
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The portfolio's holdings in mortgage-backed securities contributed to relative performance, driven by positions in non-agency securities, where supply has remained constrained. The portfolio also benefited from short positions in foreign currencies. Our bet against the euro was particularly beneficial as stalling growth in the eurozone provoked aggressive action from the European Central Bank. An out-of-benchmark allocation to Treasury inflation protected securities weighed on relative results as inflation measures remained subdued, energy prices fell, and the strong dollar promised lower import prices. An out-of-benchmark positioning in high yield bonds and leveraged loans also detracted. While fundamentals remained solid, the high yield market succumbed to technical pressures during the quarter as investors grew more risk averse and chose to lock in longer-term gains.
It remains difficult to find compelling areas of value in the ongoing low interest rate environment. That said, we believe that dollar-denominated emerging markets sovereign bonds offer some value relative to U.S. corporate debt and that emerging markets corporate bonds are attractive in general. However, we are mindful of the risks of emerging markets debt, particularly with U.S. rates poised to rise. Generally, we believe that bottom-up research has become even more important in this environment, particularly when navigating country exposure. We are relying on our global credit research capabilities to help us in our search for attractive opportunities within particular industries and among individual issuers.