Government bonds from developed non-U.S. countries generated modestly positive returns in dollar terms but lagged the strong performance of U.S. Treasuries. In local currency terms, many high-quality government bond markets outside the U.S. performed well, benefiting from safe-haven demand due to falling stock prices and global economic uncertainty. However, a stronger dollar versus some currencies eroded gains stemming from bond price appreciation. Investors also began to expect the European Central Bank and the Bank of Japan (BOJ) to further ease monetary policy to combat low inflation, benefiting the prices of eurozone and Japanese sovereign bonds. China unexpectedly let the yuan devalue, triggering a sell-off in emerging markets bonds and currencies.
The International Bond Fund returned −0.81% in the quarter compared with 0.64% for the Barclays Global Aggregate ex USD Bond Index and −1.80% for the Lipper International Income Funds Average. For the 12 months ended September 30, 2015, the fund returned −8.62% versus −7.67% for the Barclays Global Aggregate ex USD Bond Index and −6.24% for the Lipper International Income Funds Average. The fund's average annual total returns were −8.62%, −1.14%, and 2.54% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.83% as of its fiscal year ended December 31, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The International Bond Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
We reduced the portfolio's duration in UK bonds, increasing the size of our underweight to the UK, in anticipation that the Bank of England will raise rates next year (duration is a measure of sensitivity to interest rate changes). We maintained an underweight duration position in Japanese bonds, which appear expensive. In emerging markets, we slightly reduced overweights to Mexico and South Korea. In currencies, we reduced the portfolio's out-of-benchmark allocation to the U.S. dollar as we believe the potential for further dollar appreciation is limited. We also reduced exposure to the Japanese yen because of the possibility of more monetary easing from the BOJ. We added modestly to the Mexican peso.
We believe that interest rate policy in developed markets will continue to diverge, with the European Central Bank and the BOJ easing while the Federal Reserve and the Bank of England prepare to tighten, and keep volatility elevated. We also anticipate that this environment will create opportunities for relative value trading between markets at different points in their interest rate cycles. We have started looking for investments that would benefit from improving sentiment about China and a potential stabilization in commodity prices. In particular, some currencies have sold off to levels that present compelling relative value when viewed against the fundamentals of their respective economies.