The fixed income market generated modest third-quarter gains as U.S. economic data continued to improve. The unemployment rate reached 5.1% in August, the lowest level since early 2008. The Commerce Department said that second-quarter gross domestic product grew at an annualized pace of 3.9%, up from only 0.6% in the first quarter. However, heightened concerns about slowing growth in China and uncertainty about the timing of the Federal Reserve's first interest rate hike since 2006 created considerable volatility in the U.S. Treasury market. Treasuries rallied and yields fell due to strong demand from safe-haven investors. The Fed's policymaking committee opted not to increase the benchmark short-term interest rate at its September 16- 17 meeting.
The Short-Term Bond Fund returned 0.16% in the quarter compared with 0.29% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. For the 12 months ended September 30, 2015, the fund returned 0.76% versus 1.19% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. The fund's average annual total returns were 0.76%, 1.18%, and 2.95% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.52% as of its fiscal year ended May 31, 2015.
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The Short-Term Bond Fund remained underweight Treasury securities and overweight investment-grade corporate bonds and securitized sectors, including out-of-benchmark holdings in mortgage- and agency-backed securities, to generate additional incremental income. This allocation positioning hurt the portfolio's relative results as an overall flight to quality benefited Treasury securities. The portfolio ended the quarter with a duration of 1.8 years, which is in line with the benchmark. (Duration is a measure of the fund's sensitivity to changes in interest rates.) Our yield curve positioning contributed to relative results, especially our overweight to five-year maturities and a modest out-of-benchmark allocation to 10-year holdings.
The Fed has repeatedly communicated its intentions on beginning interest rate normalization with the caveat that it will implement rate increases at a measured pace. At the same time, central banks of the eurozone and Japan are aggressively purchasing assets in an effort to stimulate economic growth. We have maintained a significant overweight to investment-grade corporates to generate additional yield. We have actively rotated out of higher-volatility holdings in the energy and oil sectors and added to higher-conviction names that recently came under pressure. We have positioned the portfolio more defensively because we believe that volatility will remain elevated, especially in the short end of the curve.