U.S. Treasuries produced negative results as economic and employment growth and a Federal Reserve rate hike made safe-haven debt less attractive to investors. The yield curve flattened during the period as yields on short-term bonds rose more sharply than on intermediate- and longer-term bonds. The market remained focused on the timing of the Fed's interest rate decision, with an initial increase finally occurring on December 16. After starting the period with a yield of 2.06%, the 10-year Treasury note rose to a high of 2.32% in November amid rising expectations for Fed liftoff, but moderated somewhat and finished the year at 2.27%. The yield on the 30-year Treasury bond followed a similar path and rose to 3.01% from 2.87% during the quarter. (Bond prices and yields move in opposite directions.)
The U.S. Treasury Long-Term Fund returned −1.45% in the quarter compared with −1.38% for the Barclays U.S. Long Treasury Bond Index and −1.48% for the Lipper General U.S. Treasury Funds Average. For the 12 months ended December 31, 2015, the fund returned −1.89% versus −1.21% for the Barclays U.S. Long Treasury Bond Index and −0.37% for the Lipper General U.S. Treasury Funds Average. The fund's average annual total returns were −1.89%, 6.86%, and 6.36% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2015. The fund's expense ratio was 0.51% as of its fiscal year ended May 31, 2015.
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The fund invests at least 85% 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 was beneficial, as rates rose, but cost the portfolio yield .
Federal Reserve officials are likely to take some time assessing the impact of the Fed's December rate hike on financial markets and economic conditions, and subsequent increases are likely to occur gradually. In the Treasury market, yields on shorter maturities will likely feel the effects of rate increases more than longer maturities. Although we expect the U.S. economy to continue to strengthen, which will put some upward pressure on intermediate and longer rates, dollar strength and low inflation will likely continue to 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.