Treasury bond prices fell and yields rose in the fourth quarter as growth picked up and the Federal Reserve announced the start of its long-awaited tapering of economic stimulus. Despite renewed fiscal uncertainty in the fall, the U.S. economy expanded at an annualized 4.1% rate in the third quarter, its strongest pace in two years. The jobless rate declined to 7.0% in November, a five-year low, and the housing market continued its solid recovery. In December, the Fed said it would start winding down its monthly $85 billion asset purchase program starting in January 2014 but keep short-term rates very low for much longer. The yield on the benchmark 10-year Treasury ended the year at 3.03%, the highest level since July 2011.
The U.S. Treasury Intermediate Fund returned −1.44% in the quarter compared with −1.26% for the Barclays U.S. 4−10 Year Treasury Bond Index and −1.95% for the Lipper General U.S. Treasury Funds Average. For the 12 months ended December 31, 2013, the fund returned −4.11% versus −3.67% for the Barclays U.S. 4−10 Year Treasury Bond Index and −6.67% for the Lipper General U.S. Treasury Funds Average. The fund's average annual total returns were −4.11%, 2.80%, and 4.25% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.49% as of its fiscal year ended May 31, 2013.
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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 modest positions in securities backed by the U.S. government, including Treasury inflation-protected securities (TIPS) and Ginnie Mae mortgage-backed securities (MBS). Our TIPS allocation provides some inflation protection for our Treasury holdings, while our MBS holdings provide added yield over Treasuries, decent liquidity, and diversification for the fund. To protect shareholders from higher interest rates, the fund's duration-which measures the sensitivity of a bond fund's price to changes in interest rates-was short relative to the benchmark.
T. Rowe Price economists anticipate the Fed will end its asset purchases in late 2014 and start increasing the fed funds rate in mid-2015. Our projections are based on the central bank's timetable and assume the economic recovery stays on track. We anticipate rates in shorter maturities will remain relatively unchanged in the near term while yields on intermediate- to longer-dated maturities will remain biased to the upside as the economy strengthens, particularly if the fiscal headwinds in 2013 abate and economic data stay firm. Treasuries have proven to be an effective hedge against market turmoil, but their long-term nature and historically low yields have subjected holders to greater interest rate risk. We have some leeway to manage interest rate risk by adjusting the fund's duration, but our mandate of investing in intermediate-term securities puts the fund at risk of generating negative returns in a rising rate environment.