Intermediate- and long-term U.S. Treasury yields decreased sharply in the first quarter, as risk aversion at the beginning of the year benefited safe-haven securities. (Bond prices and yields move in opposite directions.) The 10-year Treasury note yielded only 1.78% at the end of March, down from 2.27% at the beginning of January. The yield on the 30-year Treasury bond followed a similar path and fell from 3.01% to 2.61%, its lowest quarter-end level since 2012. Global volatility led the Federal Reserve to delay further interest rate hikes despite signs of increasing health in the U.S. economy, including a strong labor market.
The U.S. Treasury Intermediate Fund returned 3.46% in the quarter compared with 3.66% for the Barclays U.S. 4−10 Year Treasury Bond Index and 5.39% for the Lipper General U.S. Treasury Funds Average. For the 12 months ended March 31, 2016, the fund returned 2.89% versus 3.34% for the Barclays U.S. 4−10 Year Treasury Bond Index and 2.38% for the Lipper General U.S. Treasury Funds Average. The fund's average annual total returns were 2.89%, 3.53%, and 5.06% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.51% as of its fiscal year ended May 31, 2015.
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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 at least 80% of its assets in Treasuries but maintains small positions in other securities backed by the U.S. government, including Treasury inflation protected securities (TIPS) and Ginnie Mae mortgage-backed securities (MBS). TIPS provide some inflation protection, while our MBS holdings provide added yield over Treasuries, decent liquidity, and diversification. The fund's duration, which measures its sensitivity to changes in interest rates, was slightly shorter than that of the benchmark during the period; this detracted from performance as rates fell.
Fed officials have indicated that further rate increases will come at a very gradual pace, with possibly just two more hikes occurring in the remainder of 2016. We expect the U.S. economy to continue to strengthen after a sluggish first quarter; while this may put some upward pressure on intermediate- and longer-term rates, dollar strength and low inflation will likely sustain strong demand for Treasuries. Also, large-scale quantitative easing efforts in Europe and Japan could hold longer-term yields down globally, making Treasury yields relatively attractive.