The evidence of slowing growth benefited long-term Treasuries, as did the flight-to-quality that resulted from the conflict between Russia and Ukraine, and volatility in emerging market currencies. At the same time, however, shorter-term Treasuries lagged. While yields on 10- and 30-year issues declined by 31 (0.31%) and 41 basis points (0.41%), respectively, five-year Treasury yields fell just two basis points (0.02%) and two-year Treasury yields rose four basis points (0.04%). One of the key factors in short-term bonds underperformance was an unexpected indication from U.S. Federal Reserve Chair Janet Yellen that short-term interest rate hikes could occur just six months after the Feds quantitative easing program is complete.
The Fund returned 0.13% during the quarter, slightly underperforming the 0.25% return of its benchmark. Portfolio positioning with respect to both yield curve and duration had a negative effect on performance. However, our tactical exposure to select sectors in mortgage-backed securities helped to offset some of that impact.
If you're a conservative investor who prefers the income and quality offered by government securities, you may find this Fund attractive. It is best suited for income-oriented investors who prefer low risk.
- Invest primarily in securities issued or guaranteed by the U.S. government or by its agencies.
- Select high-quality securities with maturities, under normal circumstances, between two and five years, with risk exposure managed in an effort to achieve reasonable returns.
- Buy and sell securities using a relative value approach that employs models that analyze and compare expected returns and assumed risks.