Agency mortgage-backed securities (MBS), including GNMAs, saw generally weaker performance in the quarter. Negative total returns were largely attributable to increasing Treasury yields, which moved steadily higher in anticipation of the Fed's December announcement that it would begin tapering its asset purchases starting in January 2014. Yields did not rise as much for GNMAs, however, thanks in large part to a favorable technical environment that persisted through much of the second half of the year. Supply of newly originated loans has decreased as mortgage rates have increased in recent months.
The GNMA Fund returned −0.50% in the quarter compared with −0.51% for the Barclays U.S. GNMA Index and −0.50% for the Lipper GNMA Funds Average. For the 12 months ended December 31, 2013, the fund returned −2.41% versus −2.12% for the Barclays U.S. GNMA Index and −2.80% for the Lipper GNMA Funds Average. The fund's average annual total returns were −2.41%, 3.88%, and 4.19% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.59% as of its fiscal year ended May 31, 2013.
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We have underweighted those issues that have been the target of the Fed's mortgage-backed security purchases, which benefited performance when the Fed announced it would start tapering. Nevertheless, our greater exposure to interest rate changes weighed on returns as Treasury yields rose. Our modest, out-of-benchmark allocation to non-agency residential MBS marginally benefited performance. The fundamentals underlying the housing sector continue to improve, and these issues offer attractive yields relative to their counterparts.
Through its quantitative easing program, the Fed has remained the marginal buyer in the market, easily absorbing the diminished level of new issues. The sustainability of this positive technical backdrop is uncertain given that this bid from the Fed will be gradually removed from the market in the coming months. Yields will likely need to move higher before investors step in and take up slack left by the Fed. Policy risk also moved back to the forefront in the quarter, as the new director of the Federal Housing Financial Authority has indicated a desire to expand refinance programs aimed at underwater homeowners. Such actions would accelerate prepayments and would likely most adversely impact higher coupon MBS.