The U.S. Treasury yield curve flattened as rates on two- and five-year U.S. government notes increased while 10- and 30-year yields decreased. Shorter-maturity Treasuries sold off as the market priced in an initial interest rate hike from the Federal Reserve in mid-2015. Longer-term Treasuries are more responsive to U.S. inflation expectations, which remain low. Mortgage-backed securities (MBS) were flat as the Fed continued to scale back its purchases of the debt. However, the Fed said that it will keep reinvesting the interest and principal payments from its large holdings of MBS into the asset class until sometime after it starts to raise interest rates, and stated that it doesn't expect to use MBS sales as a tool to tighten monetary policy.
The GNMA Fund returned 0.25% in the quarter compared with 0.16% for the Barclays U.S. GNMA Index and 0.13% for the Lipper GNMA Funds Average. For the 12 months ended September 30, 2014, the fund returned 3.69% versus 3.77% for the Barclays U.S. GNMA Index and 3.24% for the Lipper GNMA Funds Average. The fund's average annual total returns were 3.69%, 3.58%, and 4.34% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.61% as of its fiscal year ended May 31, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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 continued to position our holdings away from the parts of the GNMA market that the Fed's buying has supported. However, we have moderated this stance as the Fed has tapered its purchases. In general, we think that GNMAs currently offer more relative value than bonds outside the sector, so we have little exposure to out-of-benchmark sectors. However, we continue to find opportunities in collateralized mortgage obligations (mortgage-backed bonds with claims on cash flows determined by risk level) backed by collateral that we think offers fundamental value. We build the overall portfolio with the goal of providing shareholders with the most attractive risk-appropriate opportunities in the market.
While long-term interest rates are above their record lows, they remain well below historical averages. Although rates will likely rise as the Fed prepares to tighten monetary policy next year, we believe that the modest pace of economic growth will moderate the upswing in yields. As a result, we maintain a bias toward segments of the market that offer attractive income opportunities and that should perform well in a low-rate environment. We continue to rely heavily on our extensive team of credit analysts who provide careful, fundamental research on individual securities.