U.S. Treasuries ended a volatile first quarter with gains, marking the fifth straight quarter of positive returns for U.S. government debt. In January, the benchmark 10-year Treasury note's yield decreased by 49 basis points (a basis point is 0.01 percentage points) to 1.68%, its lowest level since May 2013. (Bond prices and yields move in opposite directions.) However, in February Treasuries experienced their sharpest sell-off since the "taper tantrum" in 2013, as the 10-year note's yield increased by about 40 basis points in approximately three weeks. Treasuries reversed course and rallied again in March, and the 10-year note's yield ended the quarter at 1.94%. In March, the Federal Reserve removed the word "patient" from its post-policy meeting statement about the timing of its first interest rate increase, paving the way for it to raise rates sometime later in 2015.
The U.S. Treasury Long-Term Fund returned 3.53% in the quarter compared with 3.96% for the Barclays U.S. Long Treasury Bond Index and 2.40% for the Lipper General U.S. Treasury Funds Average. For the 12 months ended March 31, 2015, the fund returned 19.29% versus 21.40% for the Barclays U.S. Long Treasury Bond Index and 11.09% for the Lipper General U.S. Treasury Funds Average. The fund's average annual total returns were 19.29%, 9.69%, and 7.46% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.52% as of its fiscal year ended May 31, 2014.
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The fund invests at least 85% of its assets in Treasuries but maintains small positions in 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 for the fund. The fund's duration, which measures its sensitivity to changes in interest rates, was slightly shorter relative to the benchmark as we anticipate higher interest rates in light of the strengthening U.S. economy and a less accommodative Fed.
The U.S. continues to experience economic strength and a resurgent dollar while economies in Europe, Japan, and China are showing signs of deceleration. We expect the improving U.S. economy to put gradual upward pressure on interest rates, but recent dollar strength and a benign inflation outlook will likely continue to sustain strong demand for Treasuries and help keep a lid on a rise in U.S. yields. The European Central Bank's quantitative easing program announced in January could also hold longer-term yields down globally. The Fed has prepared markets for an initial interest rate increase, which appears likely to occur sometime later in 2015. However, T. Rowe Price Chief U.S. Economist Alan Levenson notes that the Fed's latest projections for economic growth and inflation were lower than the central bank's forecasts in December, likely justifying a slower trajectory of rate increases.