Maryland municipal bonds generated good returns in the fourth quarter of 2014. Municipal debt generally outperformed taxable bonds for the year and posted very strong absolute returns. Municipal debt prices rose in tandem with long-term Treasuries, whose interest rates continued falling, despite strong U.S. economic growth and the conclusion of the Federal Reserve's monthly asset purchases in October, because of global macroeconomic considerations, such as general economic weakness and falling bond yields in Europe and Japan. Demand for munis was strong, helping the market absorb an uptick in issuance later in the year as municipalities took advantage of low interest rates.
The Maryland Tax-Free Bond Fund returned 1.47% in the quarter compared with 1.02% for the Lipper Maryland Municipal Debt Funds Average. For the 12 months ended December 31, 2014, the fund returned 9.35% versus 8.11% for the Lipper Maryland Municipal Debt Funds Average. The fund's average annual total returns were 9.35%, 5.13%, and 4.52% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2014. The fund's expense ratio was 0.46% as of its fiscal year ended February 28, 2014.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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.
The Maryland Tax-Free Bond Fund primarily invests in high-quality Maryland issuers and has a buy-and-hold orientation. We maintained a large allocation to the health care sector, which has typically been a good source of yield in the municipal market. In addition, we continue to have a strong bias toward revenue bonds that not only provide incremental yield over state and local general obligation debt, but also are largely insulated from the pension risk that we believe will become increasingly recognized by the market over time. At this time, we see more value in long-maturity bonds than in shorter-term municipals. From a credit perspective, we favor fundamentally sound bonds in the lower-quality end of the investment-grade universe as well as select high yield names that offer attractive yields.
While yields remain low, we believe that Maryland municipals represent a high-quality market that offers good opportunities for long-term investors seeking tax-free income. We remain concerned about the potential for rising rates and believe that short- and intermediate-term yields could continue to increase as we approach the first Fed rate hike. As such, we've kept the portfolio's holdings skewed toward the longer end of the market, though at slightly lower levels than in the past. 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.