International bond markets posted modest losses as many currencies depreciated against the U.S. dollar and yields rose on bonds in a number of regions. The Japanese yen, which depreciated almost 7% in the quarter, had a disproportionately large negative impact on the returns of Japanese bonds. Sovereign bonds issued by countries that were at the center of the eurozone debt crisis, including Spain, Italy, and Ireland, rallied as the eurozone region continued to recover. European high yield bonds had a particularly strong quarter, returning almost 4%. The delay in Fed tapering early in the quarter boosted demand for emerging markets debt, as the higher yields offered by the asset class helped it rebound to some degree from its summer sell-off and post a positive quarterly return.
The International Bond Fund returned −0.47% in the quarter compared with −0.72% for the Barclays Global Aggregate ex USD Bond Index and 0.10% for the Lipper International Income Funds Average. For the 12 months ended December 31, 2013, the fund returned −3.81% versus −3.08% for the Barclays Global Aggregate ex USD Bond Index and −3.40% for the Lipper International Income Funds Average. The fund's average annual total returns were −3.81%, 3.61%, and 3.93% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.84% as of its fiscal year ended December 31, 2012.
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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 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.
Our active currency selection, led by an overweight to the Mexican peso, was a large contributor to relative returns. We have a positive view on the Mexican peso as a result of the Mexican government's plans to allow private sector investments in the country's energy sector. Out-of-benchmark allocations to European high yield bonds and investment-grade emerging markets debt also helped the portfolio's relative performance as both sectors posted strong performance. We think that the relatively strong financial condition of many high yield issuers will continue to boost high yield returns relative to investment-grade debt. Our analysts like the prospects for emerging markets sovereign bonds, which have sold off to levels that appear particularly attractive given the solid fiscal condition of many emerging countries. We expect some international bond-market volatility as the Federal Reserve implements its tapering in early 2014, so we intend to maintain positions in high-quality European government debt such as UK gilts and German bunds.
The normalization of bond markets away from an environment of exceptionally low rates is most likely to affect debt issued by countries expected to post reasonable economic growth figures over the next 12 months, including the U.S. and Japan. In contrast, we expect other developed markets, such as the eurozone and the UK, to remain in a slow-growth mode, making it more likely that their central banks will continue loose monetary policies to keep rates relatively low. We expect some volatility in the international bond and currency markets as the Fed scales back the size of its securities purchases in 2014.