Short-term bonds delivered positive returns during the first quarter of 2013 and posted positive returns in the face of rising longer-term rates. The Federal Reserve kept short-term interest rates low and persisted with its program of purchasing $85 billion in Treasury and mortgage-backed securities every month. Uncertainty over fiscal policy also diminished, lessening one serious threat to the economy that had hampered economic prospects in 2012 and encouraged investors to seek out Treasuries and other low-risk assets.
The Short-Term Bond Fund returned 0.18% in the quarter compared with 0.20% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. For the 12 months ended March 31, 2013, the fund returned 1.89% versus 1.09% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. The fund's average annual total returns were 1.89%, 3.19%, and 3.28% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.53% as of its fiscal year ended May 31, 2012.
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We made only slight shifts in the portfolio's positioning during the quarter, maintaining a substantial overweight to investment-grade corporates, an out-of-benchmark allocation to securitized sectors, and a significant underweight to Treasuries and government-related securities. We maintained our modest exposure to Treasury inflation protected securities, although we slightly reduced our allocation during the quarter. Although we do not expect a rapid increase in rates, we believe a shorter-maturity posture is prudent in the current environment. Our corporate allocation slightly increased as we added short-dated floating rate securities to the portfolio. They provide a measure of protection against interest rate risk, while also offering a liquid, higher-yielding alternative to cash.
Although fiscal tightening will likely hold back the U.S. economy's growth potential, ongoing strength in the private sector should limit the impact and help sustain moderate economic momentum. We expect the Federal Reserve to begin tapering asset purchases in the second half of the year, although recent economic data could delay a rollback in its monthly bond purchases. Bond valuations overall are stretched but are well supported technically. Given the flat returns on money market funds, demand for short-term securities remains robust, and we believe investors will continue to bid for the incremental yield offered by high-quality short-dated bonds. Against this backdrop, we will maintain our diversified portfolio grounded by deep global research and a risk-aware investment process. (Diversification cannot assure a profit or protect against loss in a declining market.)