The U.S. Treasury yield curve flattened as short-term rates were little changed and longer-term yields decreased, with much of the move in the 10- and 30-year yields coming after the UK's late-June vote to leave the European Union. However, Treasury rates remained meaningfully higher than yields on other high-quality global sovereign debt, drawing more investors into the U.S. government bond market in search of yield. The 10-year Treasury note yielded 1.49% at the end of June, down from 1.78% at the beginning of April. The yield on the 30-year Treasury bond fell from 2.61% to 2.30%. The Federal Reserve has kept rates unchanged in 2016 amid a slowdown in economic activity and elevated global risks.
The U.S. Treasury Intermediate Fund returned 1.75% in the quarter compared with 1.97% for the Barclays U.S. 4−10 Year Treasury Bond Index and 3.70% for the Lipper General U.S. Treasury Funds Average. For the 12 months ended June 30, 2016, the fund returned 5.95% versus 6.68% for the Barclays U.S. 4−10 Year Treasury Bond Index and 11.15% for the Lipper General U.S. Treasury Funds Average. The fund's average annual total returns were 5.95%, 3.23%, and 5.25% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.51% as of its fiscal year ended May 31, 2015.
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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 fund invests at least 80% of its assets in Treasuries but maintains small positions in other securities backed by the U.S. government, including Treasury inflation protected securities (TIPS) and Ginnie Mae mortgage-backed securities (MBS). TIPS add some inflation protection, while our MBS holdings provide added yield over Treasuries, decent liquidity, and diversification. The fund's duration, which measures its sensitivity to changes in interest rates, was slightly shorter than that of the benchmark during the period; this detracted from performance as rates fell.
Even as the labor market tightens, we expect the Fed to take advantage of below-target inflation and use unprecedented caution before implementing further rate increases, taking time to assess the potential impact of each step in the process of normalizing monetary policy. The Fed is aware of the economy's increasing vulnerability as underlying resilience fades in the latter stages of the business cycle. Additionally, we expect global demand for the high quality and safety of U.S. government bonds to persist as U.S. yields are among the highest across developed markets, where near-zero or negative rates have become common.