Georgia municipal bonds produced modest gains in the first quarter of 2013. Long-term municipal yields rose with long-term Treasuries amid favorable economic data, reduced U.S. fiscal policy uncertainty, and increased investor willingness to invest in equities and other risk assets. Shorter-term municipal securities narrowly outperformed longer-term issues, and lower-quality issues with a yield advantage outpaced investment-grade issues. With municipal yields about the same as Treasury yields across the yield curve, tax-free securities are an attractive alternative for fixed income investors.
The Georgia Tax-Free Bond Fund returned 0.36% in the quarter compared with 0.22% for the Lipper Georgia Municipal Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 5.64% versus 5.17% for the Lipper Georgia Municipal Debt Funds Average. The fund's average annual total returns were 5.64%, 5.80%, and 4.52% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.56% as of its fiscal year ended February 29, 2012.
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We continue to believe that revenue-backed and longer-term bonds offer the most attractive value. The hospital sector is our largest allocation and our most significant overweight relative to the benchmark, and we continued to add to our exposure to the segment, particularly in higher-quality names. We also added a modest amount of intermediate-maturity, prepaid gas bonds (issued by municipalities to secure long-term gas supplies) in order to capture favorable risk-adjusted yield. Although we continue to favor lower-quality investment-grade debt, higher-yielding opportunities remain scarce in the state. Because the portfolio is dominated by holdings from the Atlanta metropolitan area, we are actively seeking bonds from elsewhere in the state for increased diversification.
While we are pleased with the tremendous performance of municipal bonds over the last two years, we believe that returns in the period ahead will moderate, as the credit and economic environment for municipalities will likely remain challenging and yields are unlikely to fall significantly from current levels. Modest economic growth and improving income and sales tax revenues are providing some support for state and local governments. However, cutbacks in state support for municipalities and persistent downward pressure on property tax revenues could keep local municipal issuers vulnerable. If the economy slides back into a recession, which we are not currently predicting, municipalities will face even tougher challenges. We believe T. Rowe Price's strong credit research capabilities have been and will remain an asset for our investors. We continue to conduct our own thorough research and assign our own independent credit ratings before making investment decisions. As always, we are on the lookout for attractively valued bonds issued by municipalities with good long-term fundamentals. This is an investment strategy that we believe will continue to serve our investors well.