Maryland municipal bonds edged lower in the second quarter of 2015 but held up better than taxable bonds. Munis fell with Treasuries in response to rising long-term interest rates, a strengthening economy, and concerns that the Federal Reserve-which kept short-term rates steady during the quarter-would begin raising interest rates sometime in 2015. Light issuance and solid demand for tax-free income provided support for the municipal market. Lower-quality and longer-maturity municipal bonds lagged higher-quality and shorter-term issues, respectively.
The Maryland Tax-Free Bond Fund returned −0.76% in the quarter compared with −1.33% for the Lipper Maryland Municipal Debt Funds Average. For the 12 months ended June 30, 2015, the fund returned 3.38% versus 1.92% for the Lipper Maryland Municipal Debt Funds Average. The fund's average annual total returns were 3.38%, 4.59%, and 4.29% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 0.45% as of its fiscal year ended February 28, 2015.
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 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 general obligation bonds. Our credit quality mix was little changed over the past three-month period. We favor A rated bonds for the premium yield they generally offer. 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.
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 later in 2015. In particular, with the Fed preparing to tighten monetary policy, we are mindful that rising rates would likely weaken the appetite for bonds with higher interest rate risk. However, with the Fed likely to act cautiously, the transition to higher rates may not be as painful as some fear. 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.