Longer-term Treasury yields declined from the two-year highs reached at the end of 2013, as weakness in certain emerging markets and geopolitical tensions over Ukraine prompted some risk aversion. Yields declined despite the Fed's tapering of asset purchases. Long-term Treasury bonds performed best. Corporate bonds did well amid favorable earnings and brisk demand for new issuance. Agency mortgage- and asset-backed securities trailed with more modest gains. High yield bonds produced another quarter of strong gains and outperformed the investment-grade universe, as investors continued to favor securities with a yield advantage.
The Short-Term Bond Fund returned 0.36% in the quarter compared with 0.23% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. For the 12 months ended March 31, 2014, the fund returned 0.47% versus 0.68% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. The fund's average annual total returns were 0.47%, 2.87%, and 2.98% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2014. The fund's expense ratio was 0.51% as of its fiscal year ended May 31, 2013.
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Our sector allocations, interest rate management, credit selection, and currency positioning aided fund performance during the quarter. We were overweight in corporate bonds and benefited from solid demand for high-quality issues with short maturities. We were also underweight in shorter-term Treasuries, which helped, since that part of our portfolio did not perform well. Our credit selection was beneficial as several banking issues did well during the quarter. Our exposure to mortgage-backed securities declined, and we are waiting to reenter that market since we currently do not see attractive valuations. We selectively rotated out of shorter-maturity positions into those with longer maturities to pick up additional yield.
The trajectory of interest rates is likely to continue upward, but we believe the rise will be more gradual in the months ahead. Rates had already risen sharply through the end of 2013. Shorter-term yields have been more stable, but they too have moved up. Slowly improving economic data, along with changing Federal Reserve policy, have precipitated much of the increase. With this outlook in mind, we are mindful of the negative impact that rising interest rates have on bond portfolios. Our goal is to find opportunities to generate extra yield without taking on too much interest rate risk. Corporate fundamentals are still healthy, and investors appear willing to invest in higher-quality, shorter-duration securities that provide relatively good incremental income.