Maryland municipal bonds generated positive returns in the first quarter, although the market experienced heightened volatility. In general, revenue bonds outperformed state and local general obligation (GO) bonds, and lower-quality municipal bonds outperformed higher-quality debt. Maryland's economic profile remains strong compared with other states, and we are comforted by its long history of responsible stewardship and prudent financial management. The state's GO bonds are rated Aaa by Moody's Investors Service and AAA by Standard & Poor's and Fitch. All three rating agencies maintain stable outlooks on Maryland's GOs.
The Maryland Tax-Free Bond Fund returned 1.07% in the quarter compared with 0.77% for the Lipper Maryland Municipal Debt Funds Average. For the 12 months ended March 31, 2015, the fund returned 6.71% versus 5.28% for the Lipper Maryland Municipal Debt Funds Average. The fund's average annual total returns were 6.71%, 5.09%, and 4.66% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. The fund's expense ratio was 0.46% as of its fiscal year ended February 28, 2014.
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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.
The Maryland Tax-Free Bond Fund is primarily invested in high-quality Maryland issuers and has a buy-and-hold orientation. In terms of sector positioning, we continued to focus on revenue sectors with a heavy emphasis on health care (mostly hospitals). Health care bonds typically offer higher-than-average yields. Maryland has many well-run hospitals, and its unique reimbursement environment improves the risk/reward potential in this sector. Our preference for revenue sectors stems from the relative security of specific claims on revenues versus the generic pledges of taxing power associated with GOs.
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, there could be hurdles in 2015. In particular, with the Federal Reserve preparing to tighten monetary policy, we are mindful that rising rates would likely weaken the appetite for bonds with higher interest rate risk. We believe there is still value in longer-maturity debt, but we have become a bit more cautious and tempered our enthusiasm for the longest-term bonds by shifting our investment emphasis to bonds with somewhat shorter 15- to 20-year maturities. 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.