Maryland municipal bonds declined in the third quarter as interest rates increased across all fixed income markets. Short-term securities held up better than long-term issues but still struggled as cash flowed out of municipal bond portfolios. Bond yields rose in anticipation of reduced Fed stimulus, but long-term municipal yields rose more than long-term Treasury yields, which is unusual. On a relative basis, this has increased the attractiveness of long-term tax-free bonds for high-tax-bracket fixed income investors.
The Maryland Tax-Free Bond Fund returned −0.36% in the quarter compared with −1.95% for the Lipper Maryland Municipal Debt Funds Average. For the 12 months ended September 30, 2013, the fund returned −2.64% versus −4.65% for the Lipper Maryland Municipal Debt Funds Average. The fund's average annual total returns were −2.64%, 5.92%, and 4.04% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.46% as of its fiscal year ended February 28, 2013.
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The Maryland Tax-Free Bond Fund is managed with a buy-and-hold orientation. Once we buy bonds for the fund, we generally expect to hold them until maturity. Although we invested across the maturity and credit-quality spectrum in recent months, we've mainly focused on longer-term bonds with maturities of 20 years and longer because we believe that long-term bonds still represent the best values in our market. While these purchases detracted from our comparison with the benchmark in the short run, we are confident that the higher income from these securities will bring good returns over the longer term. We favor revenue-backed securities over general obligation bonds and maintain significant overweights in the hospital and education sectors. We also have a large allocation to transportation bonds.
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 Maryland municipal bonds offer good 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.