U.S. Treasury inflation protected securities (TIPS) edged lower in the fourth quarter as inflation remained subdued and inflation expectations softened amid a substantial and unexpected drop in global oil prices. In the fixed rate Treasury market, long-term bond prices rose as nominal yields declined due to faltering growth around the world, and as investors favored attractive U.S. government bond yields versus sovereign debt yields in other developed countries. Short-term Treasury note yields, in contrast, increased slightly in anticipation of Federal Reserve rate hikes likely commencing sometime in mid-2015.
The Inflation Protected Bond Fund returned −0.16% in the quarter compared with −0.03% for the Barclays U.S. TIPS Index and −0.89% for the Lipper Inflation Protected Bond Funds Average. For the 12 months ended December 31, 2014, the fund returned 3.42% versus 3.64% for the Barclays U.S. TIPS Index and 1.65% for the Lipper Inflation Protected Bond Funds Average. The fund's average annual total returns were 3.42%, 3.62%, and 3.95% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.59% as of its fiscal year ended May 31, 2014.
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The fund invests mostly in TIPS to protect against higher actual or expected inflation. The focus of this allocation is in longer-term TIPS, which offer positive real yields. To diversify the portfolio, we maintained allocations among short-term fixed rate corporate, asset-backed, mortgage-backed, and commercial mortgage-backed securities. When appropriate, we add exposure to non-U.S. inflation-linked securities that offer positive real yields versus TIPS, as well as foreign currencies that we expect to appreciate.
The sharp decline in crude oil prices places any immediate concerns about higher headline inflation on the back burner and is likely to suppress the near-term performance of TIPS. Determining whether the recent change in the energy market is temporary or permanent will be critical. A longer-lasting decline in energy prices, especially if it is the result of weaker global demand, would be more problematic. Lower energy prices alone are unlikely to deter the Fed's resolve to begin removing its zero interest rate policy in 2015. Such a move would lift real rates without the prospect of accompanying higher inflation, an unfavorable mix for TIPS holders. While there is much uncertainty about how global markets will respond to recent developments in the months ahead, we will continue to take a longer-term view of the investment landscape.