U.S. bonds generated positive returns amid weak inflation readings and decelerating economic growth. Developed non-U.S. bonds produced negative returns in dollar terms, driven by the dollar appreciating against most currencies, which outstripped the returns made from the overall decline of yields in key government bond markets, such as the eurozone. High yield bonds outperformed high-quality issues, as investors once again favored their attractive yields following the oil-related high yield market weakness late last year. Emerging markets bonds were mixed. Generally, bonds denominated in local currencies declined in dollar terms; dollar-denominated debt registered gains.
The New Income Fund returned 1.70% in the quarter compared with 1.61% for the Barclays U.S. Aggregate Bond Index and 1.63% for the Lipper Core Bond Funds Average. For the 12 months ended March 31, 2015, the fund returned 5.32% versus 5.72% for the Barclays U.S. Aggregate Bond Index and 4.89% for the Lipper Core Bond Funds Average. The fund's average annual total returns were 5.32%, 4.40%, and 5.13% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.63% as of its fiscal year ended May 31, 2014.
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The portfolio benefited from its positions in mortgage-backed securities and investment-grade corporate bonds. Within MBS, our "barbell" position contributed as lower rates, along with the potential for policy risks, sparked prepayment concerns during the quarter. An overweight to financials within the investment-grade corporate sector contributed, where balance sheet improvement due to both regulatory pressures and low interest rates also helped. An allocation to the high yield sector also added value. High yield was one of the better performers during the quarter, as solid investor demand and generally positive company fundamentals supported the sector. Our relatively short duration posture, designed to provide some protection against rising rates, weighed on results as interest rates generally declined over the quarter.
We anticipate an upward bias to interest rates as labor markets strengthen and the Fed moves toward rate normalization. Therefore, we are maintaining a slightly short-duration posture versus the benchmark. We also anticipate the rate hikes will have the most effect on shorter-dated securities, while the longer end of the curve will likely remain constrained due to sluggish global growth and relatively attractive U.S. rates. Modest risk premiums prohibit aggressive overweight to most investment-grade sectors, although asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) stand out as reasonable opportunities. This being the case, we expect security selection and interest rate management to play elevated roles in generating portfolio performance. We believe our investment process, which blends top-down and bottom-up fundamental analyses, is well suited to finding opportunities across a variety of sources, including non-U.S. issues. As always, we remain focused on carefully managing risk, increasing it only when we expect the portfolio to be adequately compensated.