Short-term bonds eked out a positive return during the second quarter. High yield bonds slightly outperformed investment-grade issues, as investors continued to favor bonds with attractive yields in a low interest rate environment. In the investment-grade universe, long-term Treasury securities performed best, but corporate, municipal, and mortgage-backed securities also did well. Asset-backed securities lagged. The Federal Reserve continued to taper its asset purchases, and we believe the Fed is likely to finish winding down its asset purchases by the end of the year.
The Short-Term Bond Fund returned 0.60% in the quarter compared with 0.33% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. For the 12 months ended June 30, 2014, the fund returned 1.72% versus 1.14% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. The fund's average annual total returns were 1.72%, 2.42%, and 3.17% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.51% as of its fiscal year ended May 31, 2013.
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Our sector allocations, interest rate management, credit selection, and currency allocation all aided performance during the period. An overweight in corporate bonds was particularly beneficial as the demand for new issuance was strong. We maintained a modest exposure to longer maturities, which performed well as yields fell during the period, although we are shortening maturities to minimize interest-rate risk down the road. We started to trim our exposure to corporate securities at the end of the period, since their valuations have become stretched in the wake of the recent rally. We continue to look for opportunities to add asset-backed securities and commercial mortgage-backed securities to the portfolio.
We expect U.S. economic growth to rebound from its first-quarter lull and interest rates to gradually trend higher. With labor market slack diminishing and wage inflation beginning to trend higher, there is a strong possibility that the Fed could begin to raise short-term interest rates earlier than expected. Two- and five-year yields might be vulnerable as the first rate hike approaches and the market gauges the pace of subsequent increases. We expect the Fed to continue reinvesting principal payments on its securities portfolio until sometime after the rate-hiking cycle begins, sustaining some support for Treasuries and mortgage-backed securities. Credit fundamentals remain solid, and our analysts are finding opportunities for risk-adjusted returns within their respective sectors. In addition, we continue to look for opportunities to add incremental yield where available in other areas.