Tax-free municipal bonds produced moderate gains and outperformed taxable bonds in the third quarter of 2014. Municipal debt moved roughly in tandem with longer-term Treasuries, whose interest rates declined (despite the Federal Reserve's tapering of its asset purchases) due to increased geopolitical risks and concerns about sluggish global economic growth. Steady demand for munis and generally limited supply were also favorable factors. Short- and intermediate-term Treasury note yields increased as investors began to anticipate the onset of Federal Reserve rate hikes around mid-2015. Shorter-term municipal yields rose to a lesser extent, however. Long-term and lower-quality municipals outperformed short-term and higher-quality issues, respectively, as investors sought securities with relatively attractive yields.
The Georgia Tax-Free Bond Fund returned 1.78% in the quarter compared with 1.71% for the Lipper Other States Municipal Debt Funds Average. For the 12 months ended September 30, 2014, the fund returned 8.58% versus 7.89% for the Lipper Other States Municipal Debt Funds Average. The fund's average annual total returns were 8.58%, 4.52%, and 4.25% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.54% as of its fiscal year ended February 28, 2014.
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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.
As in prior periods, we kept a fairly high allocation to the health care sector, and we have recently added modestly to our prepaid gas and transportation holdings. Collectively, these sectors have typically been a good source of yield in the municipal market. More generally, we continued our emphasis on revenue sectors, favoring the relative security of specific claims on revenues versus the generic pledges of taxing power associated with general obligation bonds. Revenue sectors have also typically provided more yield.
We believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income, though we acknowledge that it has become more challenging to find attractive yields outside of Puerto Rico and other distressed segments of the market. We remain concerned about the potential for rising rates, but we believe that further rate increases will be at a more measured pace than what we witnessed last year. Ultimately, we believe T. Rowe Price's independent credit research is our greatest strength and will remain an asset for our investors as we navigate the current market environment. As always, we are on the lookout for attractively valued bonds issued by municipalities with good long-term fundamentals, an investment strategy that we believe will continue to serve our investors well.