Treasury inflation protected securities (TIPS) declined in the third quarter. Several factors weighed on their performance, including weaker-than-expected consumer price index (CPI) readings, declining commodity prices, a stronger U.S. dollar (which reduces import prices), and generally weak global growth and inflation data. Real yields, which are calculated by subtracting the inflation rate from a bond's nominal yield, generally rose, which also provided a headwind for TIPS. In the conventional Treasury market, long-term bond yields declined, but short- and intermediate-term yields rose in anticipation of Federal Reserve rate increases likely starting around mid-2015.
The Inflation Protected Bond Fund returned −1.88% in the quarter compared with −2.04% for the Barclays U.S. TIPS Index and −2.15% for the Lipper Inflation Protected Bond Funds Average. For the 12 months ended September 30, 2014, the fund returned 1.30% versus 1.59% for the Barclays U.S. TIPS Index and 0.92% for the Lipper Inflation Protected Bond Funds Average. The fund's average annual total returns were 1.30%, 4.07%, and 4.20% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.59% 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.
The fund invests mostly in TIPS to protect against higher actual or expected inflation. The focus of this allocation is in longer-term TIPS. We are underweight intermediate-term TIPS, which helped our relative performance because real rates among these securities rose the most. To diversify the portfolio, we maintain allocations among corporate, asset-backed, mortgage-backed, and commercial mortgage-backed securities. During the quarter, these out-of-benchmark investments also helped the fund's relative performance. When appropriate, we add exposure to non-U.S. inflation-linked securities that can potentially offer positive real yields versus TIPS, as well as foreign currencies that we expect to appreciate.
The Fed is on track to conclude its asset purchases in October. Assuming that the economy continues to grow, we believe the Fed will begin to increase short-term rates around mid-2015. As we approach the first rate hike, we would expect intermediate-term rates to continue rising. Short-term rates, however, are unlikely to rise significantly until the Fed actually begins tightening monetary policy. The recent underperformance of TIPS has made their valuations more attractive. While we believe real yields have room to rise prior to the start of the Fed's tightening of monetary policy, we will be patient to add to our TIPS positions due to near-term disinflationary headwinds.