Tax-free municipal bonds produced positive returns but trailed taxable bonds in the first quarter of 2016. Limited supply and solid demand have created a strong technical environment for munis, despite the Fed's December rate hike and the potential for additional rate increases this year. Year-over-year issuance has been declining due to a sharp drop in refinancing activity, and muni market inflows have been strong. Intermediate- and long-term Treasury yields fell sharply, while municipal yields decreased to a lesser extent. In the municipal market, longer-maturity bonds outperformed shorter-maturity issues, and lower-quality securities outperformed higher-quality bonds. In terms of sector performance, revenue bonds outperformed state and local general obligations (GO) .
The Georgia Tax-Free Bond Fund returned 1.58% in the quarter compared with 1.45% for the Lipper Other States Municipal Debt Funds Average. For the 12 months ended March 31, 2016, the fund returned 3.81% versus 3.00% for the Lipper Other States Municipal Debt Funds Average. The fund's average annual total returns were 3.81%, 5.85%, and 4.46% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.53% as of its fiscal year ended February 28, 2015.
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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.
While we have maintained our overweight to revenue bonds, we have added to the general obligation (GO) sector recently. Due to our concerns about proper funding of long-term liabilities such as pensions and retiree health care coverage, we prefer to keep our allocation to this portion of the market low, but we have been able to identify several highly rated issuers in the state where pension worries are less severe. While our overall view is for higher rates eventually, we have moderated the defensive nature of our duration positioning as it became increasingly clear that the pace of Fed rate hikes in 2016 would be much slower than most had predicted. (Duration measures a portfolio's sensitivity to interest rate increases.)
We believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. While fundamentals are sound overall and technical support should persist, investors should expect modest returns in 2016, perhaps just earning the coupon income offset somewhat by modest declines in principal values. Munis should be less susceptible to rising rates than Treasuries given their attractive tax-equivalent yields and the steady demand for tax-exempt income. 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.