For most of the third quarter, fixed income markets were focused on rising yields and concerns over interest-rate risk as investors widely expected the Federal Reserve to begin scaling back its asset purchases in September. However, the Fed surprised investors when it announced that it would maintain its current monthly pace of buying $85 billion in Treasuries and mortgage-backed securities until the economy gained a firmer footing. That development boosted fixed income market sentiment late in the quarter. Short-term bonds responded positively, as investors continued to seek out high-quality, short-duration assets offering incremental yield.
The Short-Term Bond Fund returned 0.39% in the quarter compared with 0.40% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. For the 12 months ended September 30, 2013, the fund returned 0.21% versus 0.62% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. The fund's average annual total returns were 0.21%, 3.24%, and 3.07% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.51% as of its fiscal year ended May 31, 2013.
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Our corporate allocation was stable during the quarter, although we added several positions and made adjustments to our holdings. We continue to maintain a meaningful exposure to BBB corporate debt, believing it will continue to perform well due to solid fundamentals and modest economic growth. We have also added new issuance bonds, generally within five-year maturities. We continued to add to corporate credits that our analysts favor, offering solid business and financial profiles. We modestly increased our allocation to Treasury inflation protected securities in the middle of the quarter, with a particular focus on those maturing in July 2014, which appeared undervalued. This strategy allowed us to put cash to work in securities offering attractive valuations relative to cash and nominal Treasuries, while not extending the duration (a measure of the portfolio's sensitivity to fluctuating interest rates) of the portfolio.
The Fed's September announcement implied that its accommodative policies will remain in place a while longer. This has put downward pressure on Treasury yields and should be supportive of riskier assets in the near term. Nevertheless, we believe the central bank will begin cutting back on quantitative easing within the next few meetings, and yields are likely to rise again in anticipation of the announcement. Political brinkmanship in Washington over the budget and debt ceiling is a wild card. We expect Congress to ultimately reach an agreement on the budget and debt ceiling when faced with a worst-case scenario of a default. Given our bias for rates to gradually drift higher, we are maintaining positions in shorter-term securities, which are less vulnerable to rising rates.