Tax-free municipal bonds outperformed taxable bonds in the fourth quarter. Intermediate- and long-term Treasury interest rates increased as the economy strengthened, and Congress passed a two-year budget deal that could add slightly to 2014 economic growth. The Federal Reserve announced in mid-December that it will begin to curtail its $85 billion monthly asset purchases in January. The 10-year Treasury note yield rose to 3.03% by the end of 2013, the highest level in about two and a half years. In the municipal market, long-term interest rates increased, but not as much as Treasury yields, while shorter-term yields declined or were flat.
The New Jersey Tax-Free Bond Fund returned 0.35% in the quarter compared with −0.05% for the Lipper New Jersey Municipal Debt Funds Average. For the 12 months ended December 31, 2013, the fund returned −3.15% versus −5.00% for the Lipper New Jersey Municipal Debt Funds Average. The fund's average annual total returns were −3.15%, 6.06%, and 3.85% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2013. The fund's expense ratio was 0.51% as of its fiscal year ended February 28, 2013.
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Health care and education names represent our largest overweights. We maintain a meaningful allocation in hospitals. New Jersey does not have higher-rated hospitals, but we own names that we believe are fundamentally sound and represent high quality for the state. In terms of credit quality, the fund is overweight in A and BBB rated bonds. We are overweight in bonds with maturities of 15 years and longer, though our overweight in longer-maturity bonds is smaller compared with that of our peer group. Diversification away from the state guarantor tends to be more difficult in New Jersey due to the nature of much of the issuance in the state. During the quarter, we continued to reduce exposure to Puerto Rican debt. We slightly increased our hospital and port allocations and trimmed our exposure to local general obligation and industrial revenue debt.
The decline in municipal bond prices in 2013 has rattled some investors but does not represent a fundamental change in the nature, quality, or risk characteristics of the market. The underperformance of long-term munis in 2013 makes their nominal and taxable-equivalent yields more attractive, but if market outflows persist and rates resume rising, further price declines are likely. State and local government liabilities, such as pension benefits and health care costs, are a growing concern. Most municipal governments are maintaining balanced budgets, but fewer municipalities have meaningfully addressed these longer-term liabilities. States will need to continue these efforts on their own, as a federal bailout of state and local governments without some losses to bondholders seems unlikely. Even as interest rates return to more normal levels, bonds will remain an important asset class. We expect to continue finding good investment opportunities for long-term-oriented, income-seeking investors.