Interest rates moved sharply higher during the past three months, in response to a long-anticipated pullback in the Federal Reserve's asset purchase program. The 10-year Treasury note rose to 3.03% by the end of December, the highest level in about two-and-a-half years. Short-term bonds posted slightly positive returns, as they were less sensitive to the volatility in the fixed income market. Investment-grade corporate bonds were slightly positive, and high yield securities were strongest. Long-term Treasuries suffered the most, and other government bonds fell to a lesser extent.
The Short-Term Bond Fund returned 0.36% in the quarter compared with 0.18% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. For the 12 months ended December 31, 2013, the fund returned 0.30% versus 0.64% for the Barclays 1−3 Year U.S. Government/Credit Bond Index. The fund's average annual total returns were 0.30%, 3.31%, and 3.08% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.51% as of its fiscal year ended May 31, 2013.
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We have positioned the portfolio to generate additional yield in all subsectors of the corporate bond market, including industrials, financials, and utilities. Industrials have fared reasonably well in times of market volatility, such as we experienced during the reporting period. Within those groups, we have been focusing on shorter maturities with reasonable yield advantages over Treasuries. In financials, we favor companies with solid business models. We maintained an exposure to mortgage-backed securities to increase the portfolio's diversification. The bonds provide us with additional liquidity and a yield advantage over Treasuries. Valuations have become less attractive in this area, however, and we have been reducing our positions in advance of the pullback in the Fed's asset purchase program.
The Fed indicated that it would begin to gradually unwind its monthly asset purchases beginning in January, but the central bank stated that it will keep short-term rates tethered close to 0% until the economy strengthens further and inflation begins to accelerate. The U.S. economy has remained on stable ground, with recent employment data showing signs of improvement. Corporate default rates should remain low. Considering the likely direction of Fed policy during the coming months, we believe rates will continue to rise. Accordingly, we are maintaining a relatively short duration in the portfolio and believe this strategy will be well supported, as corporate fundamentals are still solid and investors continue to invest in high-quality, shorter-duration assets.