U.S. Treasury yields across most maturities fell during the first quarter due to some weak U.S. economic data, the Federal Reserve's tapering of asset purchases, and volatility in emerging markets. Longer-maturity Treasury bonds experienced the most significant yield declines amid geopolitical risk aversion, while short-term Treasury yields rose. Non-U.S. developed market government bonds produced healthy returns. Fears that weakening growth in emerging markets, particularly China, would weigh on developed market economies led to more demand for the sovereign bonds of developed countries. Emerging markets bonds and currencies dropped sharply in January before retracing those losses to finish up significantly. High yield bonds also posted strong returns.
The Strategic Income Fund returned 2.86% in the quarter compared with 2.08% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and 2.37% for the Lipper Global Income Funds Average. For the 12 months ended March 31, 2014, the fund returned 2.11% versus 1.42% for the Barclays Global Aggregate ex Treasury Bond USD Hedged Index and 0.77% for the Lipper Global Income Funds Average. The fund's average annual total returns were 2.11%, 8.89%, and 9.21% for the 1-, 5-, and Since Inception (12/15/2008) periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.84% as of its fiscal year ended May 31, 2013.
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As a result of the sell-off in emerging markets bonds early in the quarter, we believe that bonds of some developing countries offer attractive potential for total returns. We have been selectively adding emerging markets sovereigns denominated in U.S. dollars. Valuations for local currency emerging markets bonds are also intriguing, but we have been more cautious about adding them because we expect continued near-term currency volatility. We remain very aware of the risks of emerging markets, including slowing growth and stubborn inflation, and security selection is critical. In the U.S., we still favor high yield debt over investment-grade bonds, although it is becoming more difficult to find attractively valued securities. We kept the fund's duration (a measure of sensitivity to interest rate changes) shorter than the duration of the benchmark, which should help relative performance in a rising interest rate environment.
With fewer fiscal headwinds, we expect the economic picture in the U.S. to continue to brighten, leading to a gradual rise in rates. We anticipate that economic data, and occasionally risk aversion, will influence the direction of longer-term rates. Short-term yields may continue to be pressured higher as the market prices in an initial rate increase from the Federal Reserve, which we think will happen in mid-2015. Valuations are generally less attractive relative to historical levels, and low volatility has provided limited opportunities for tactical allocation. As always, we remain focused on carefully managing risk.