Maryland municipal bonds generated strong gains in the second quarter and outperformed taxable bonds. The T. Rowe Price economics team believes that the Federal Reserve will wind down its asset purchase program by the end of 2014 and that short-term interest rate increases are likely to begin in mid- to late 2015. The municipal yield curve continued to flatten during the second quarter: Long-term yields declined, while short-term rates remained anchored by the Fed's commitment to keep them low "for a considerable time" after it stops purchasing securities. Longer-term and lower-rated municipals outperformed shorter-term and higher-quality issues, respectively.
The Maryland Tax-Free Bond Fund returned 2.45% in the quarter compared with 1.92% for the Lipper Maryland Municipal Debt Funds Average. For the 12 months ended June 30, 2014, the fund returned 6.13% versus 2.93% for the Lipper Maryland Municipal Debt Funds Average. The fund's average annual total returns were 6.13%, 5.92%, and 4.66% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.46% as of its fiscal year ended February 28, 2014.
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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. The fund favors revenue bonds over general obligation debt, and we have maintained a significant overweight allocation in the health care sector. The majority of our health care allocation is in hospitals and life care holdings. As was the case for much of 2013, we are also heavily invested in transportation and education bonds. 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.
We intend to continue to overweight revenue bonds. We are attracted to the relative security of specific claims on revenues versus generic pledges of taxing power associated with general obligations, and revenue bonds typically also provide more yield. Health care remains our largest sector allocation, and these holdings continue to generate good performance. We expect health care to remain a core sector over time, as the income from many of these bonds is at a premium to the broader municipal market. 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.