Georgia municipal bonds declined in the third quarter of 2013 as interest rates rose across all fixed income markets. Longer-term Treasury interest rates rose to two-year highs through early September. However, bond prices rallied and yields retreated in the final weeks of the quarter as the Fed surprisingly delayed a widely expected mid-September reduction of asset purchases and an October federal government shutdown and debt ceiling showdown appeared likely. Long-term municipal bond prices fell, as 30-year muni yields rose for the quarter but finished below their highest levels. Short- and intermediate-term securities performed better than long-term issues, as yields declined for the quarter. Lower-quality munis in the investment-grade universe fared worse than higher-quality issues. High yield munis also struggled.
The Georgia Tax-Free Bond Fund returned 0.15% in the quarter compared with −1.53% for the Lipper Other States Municipal Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned −2.99% versus −4.46% for the Lipper Other States Municipal Debt Funds Average. The fund's average annual total returns were −2.99%, 5.69%, and 3.82% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.53% as of its fiscal year ended February 28, 2013.
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We continue to believe that revenue-backed debt and long-term bonds offer the most attractive value among Georgia municipal debt. Our most significant absolute sector allocation is to hospitals, which is also our most significant overweight relative to the benchmark. Activity in the fund was limited during the third quarter, but we added airport bonds and the bonds of a county water and sewer system. Lower-quality, investment-grade debt opportunities remain scarce in the state, but one of the ways we have added yield in the portfolio has been through a modest allocation to prepaid gas bonds. The portfolio is dominated by holdings from the Atlanta metropolitan area, but we are looking to add bonds from outside the region for diversification.
The decline in municipal bond prices has rattled some investors, but it does not represent a fundamental change in the nature, quality, or risk characteristics of the market. We continue to believe that Georgia municipal bonds offer good investment opportunities for investors with a long-term focus and attractive tax-free income in what is still a very low interest rate environment. The recent underperformance of long-term munis makes their nominal and tax-equivalent yields even more compelling, but if rates continue rising unabated and market outflows persist, further price declines are likely. As always, we are on the lookout for attractively valued bonds issued by municipalities with good fundamentals-an investment strategy that has served our investors well in the past.