Maryland municipal bonds produced modest positive returns in the first quarter of 2013. Long-term municipal yields rose with long-term Treasuries amid favorable economic data, reduced U.S. fiscal policy uncertainty, and increased investor willingness to invest in equities and other risk assets. Shorter-term municipal securities narrowly outperformed longer-term issues, and lower-quality issues outpaced investment-grade issues. With municipal and Treasury yields about the same across the yield curve, tax-free securities are an attractive alternative for fixed income investors.
The Maryland Tax-Free Bond Fund returned 0.53% in the quarter compared with 0.31% for the Lipper Maryland Municipal Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 5.80% versus 4.51% for the Lipper Maryland Municipal Debt Funds Average. The fund's average annual total returns were 5.80%, 6.15%, and 4.68% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.46% as of its fiscal year ended February 29, 2012.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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The Maryland Tax-Free Bond Fund is managed with a buy-and-hold orientation; once we buy bonds for the portfolio, we generally hold them until maturity. We favor revenue-backed securities over general obligation bonds and maintain significant overweights in the hospital and education sectors. We also have a large allocation to transportation bonds. At this time, we see more value in longer-maturity bonds than in short-term securities. Because we believe spreads still have room to tighten, we also favor lower-quality bonds. However, Maryland is a high-quality state and it can be challenging to find attractive lower-quality, investment-grade Maryland issuance. We have, therefore, focused our emphasis on holding defensively structured long bonds in order to boost yield while limiting the portfolio's sensitivity to changes in interest rates.
While we are pleased with the tremendous performance of Maryland municipal bonds over the last two years, we believe that returns in the period ahead will moderate, as the credit and economic environment for municipalities is likely to remain challenging and yields are unlikely to fall significantly from current levels. We are comforted somewhat by Federal Reserve assurances that interest rate hikes are not imminent and by the demonstrated ability of states to balance their budgets in tough times. We believe T. Rowe Price's strong credit research capabilities have been and will remain an asset for our investors. As always, we are on the lookout for attractively valued bonds issued by municipalities with good fundamentals. This is an investment strategy that has served our investors well in the past.