For much of the quarter, bond prices were negatively impacted by the interest rate environment. U.S. Treasury rates rose on improved sentiment over prospects for the U.S. economy as well as on comments from the Federal Reserve to the effect that the inevitable tapering of its bond purchases under quantitative easing was around the corner. However, in mid-September, the Fed revised its earlier guidance, indicating that the reduction of its support for the bond market would be deferred. As a result, long rates eased late in the period to end only modestly above where they started.
The U.S. Treasury yield curve steepened during the quarter as rates finished slightly lower on shorter maturities and somewhat higher farther out on the curve. To illustrate, the two-year yield declined from 0.36% to 0.33% and the five-year declined from 1.41% to 1.39%, while the 10-year rose from 2.52% to 2.64% and the 30-year from 3.52% to 3.69%. For the quarter, credit spreads generally narrowed, with mortgage-backed securities the biggest beneficiary within the benchmark, followed by investment-grade corporate issues.
For the quarter, the Barclays U.S. Aggregate Bond Index returned 0.57%, outperforming comparable-duration U.S. Treasury securities. The Funds return of 0.49% closely tracked the Index for the quarter. We will continue to invest in a sample of securities that are representative of the Index in an effort to provide returns that closely approximate those of the Index.
If you are a long-term, income-oriented investor who is looking to diversify your investments by gaining broad exposure to the U.S. bond market, then this Fund may be right for you. It offers a diversified portfolio of bond securities approximating the Lehman Brothers U.S. Aggregate Index.
- Passively managed in an effort to replicate the performance and composition of the Barclays U.S. Aggregate Bond Index.
- Gain broad exposure to the U.S. Treasury, government agency, investment-grade corporate bond, mortgage- and asset-backed sectors of the fixed income markets.
- Provide investors with a way to gain broad exposure to U.S. bond market.