Tax-free municipal bonds produced positive returns and outperformed taxable bonds in the second quarter of 2016. With solid fundamentals and relatively attractive yields, munis generated strong demand as global growth expectations slowed, interest rates on many high-quality government bonds in developed markets were minimal or negative, and volatility escalated after the British vote to leave the European Union. Yields decreased across the municipal yield curve, with long-term rates reaching record lows. In the municipal market, longer-maturity bonds outperformed shorter-maturity issues, and lower-quality securities outperformed higher-quality bonds as investors continued to search for yield.
The Maryland Tax-Free Bond Fund returned 2.69% in the quarter compared with 2.70% for the Lipper Maryland Municipal Debt Funds Average. For the 12 months ended June 30, 2016, the fund returned 7.32% versus 6.74% for the Lipper Maryland Municipal Debt Funds Average. The fund's average annual total returns were 7.32%, 5.47%, and 4.94% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2016. The fund's expense ratio was 0.46% as of its fiscal year ended February 29, 2016.
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The fund continued to focus on revenue sectors, with a heavy emphasis on health care (mostly hospitals) debt. Health care bonds typically offer above-average yields, and the state has many well-run hospitals with a unique reimbursement environment that improves the risk/reward trade-off in this sector. Our preference for revenue debt stems from the relative security of specific claims on revenues versus the generic pledges of taxing power associated with general obligation bonds. Our duration positioning was little changed during the quarter, while the fund's weighted average maturity moved modestly longer. (Duration measures a portfolio's sensitivity to interest rate changes.)
We believe that the municipal bond market remains a high-quality market that offers good opportunities for long-term investors seeking tax-free income. Fundamentals are sound overall, and technical support should persist as global economic uncertainties further increase demand for the relatively high-quality and somewhat insulated municipal bond asset class. Amid increased volatility, we expect the Fed to approach the next rate hike with an added degree of caution and believe we could remain in a low rate environment for some time. 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.