Supported by a rebound in oil prices and dovish comments from Federal Reserve officials, Treasury inflation protected securities (TIPS) produced positive results in the first quarter and outperformed fixed rate Treasuries. Risk aversion at the beginning of the year benefited safe-haven securities, driving yields of intermediate- and longer-term Treasuries lower. (Bond prices and yields move in opposite directions.) Despite signs of increasing health in the U.S. economy, the Fed delayed further interest rate hikes as a result of global volatility. Headline inflation, which includes energy and food prices, rose just 0.9% in the 12-month period ended March 31. While oil and gas prices increased in March, over the past year energy costs have dropped nearly 13%.
The Inflation Protected Bond Fund returned 4.05% in the quarter compared with 4.46% for the Barclays U.S. TIPS Index and 3.53% for the Lipper Inflation Protected Bond Funds Average. For the 12 months ended March 31, 2016, the fund returned 1.20% versus 1.51% for the Barclays U.S. TIPS Index and 0.11% for the Lipper Inflation Protected Bond Funds Average. The fund's average annual total returns were 1.20%, 2.54%, and 4.20% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.58% as of its fiscal year ended May 31, 2015.
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We increased our TIPS positioning from 82% of the fund to 90% during the quarter as positives began to outweigh negatives for the sector. Valuations were more attractive, and declining energy prices became less of a factor. Concerns about the effects of potential Fed rate hikes also lessened because of the central bank's statement that it would need to see actual inflation before moving forward. Applying the firm's extensive research capabilities, we also maintain small positions in other fixed income sectors, such as asset-backed securities and investment-grade corporate bonds, that provide income without unnecessarily adding to the risk of the portfolio.
An increase in inflation expectations will depend on several factors, including a continued commitment by the Fed to remain cautious on further rate increases. This type of commitment from the central bank appears likely now. A stable dollar and oil prices in the mid-30-dollar range or higher will also be important. Consensus forecasts for headline inflation show it rising to about 1.5% this year and converging with core inflation (excluding food and energy) in 2017. Core prices have risen 2.2% over the most recent 12 months. While inflation has been low recently, investors should remember that an investment in TIPS can help preserve real value in their portfolio over longer time periods.